For the second time in as many months, a new issuer has joined the auto securitization scene. Credito Real USA Finance, a Fort Lauderdale, Fla.-based subprime lender, is gearing up to securitize $130.4 million of loans in its debut transaction. The issuance comes on the heels of a $302.9 million ABS deal issued by Unify Financial Credit Union in early April.
Both transactions are private placements, but that’s about as far as their similarities go. Unify’s five-tranche securitization had an average credit score of 748, despite the fact that 85% of the securitized loans had terms of 75 to 84 months. Meanwhile, Credito Real’s three-tranche securitization has an average credit score of 558 — nearly 200 points lower than Unify’s — and an average loan term of 67 months.
Though Credito Real is a newcomer to the ABS market, the company got its start as AFS Acceptance in 2007, and was acquired by Mexico-based consumer finance company Credito Real SAB de CV SOFOM in 2015.
Credito Real USA Finance takes a three-pronged approach to originations. The bulk of its business stems from a traditional subprime auto finance program, the Classic Program, which is geared toward customers with limited or tarnished credit histories. The Vamos Program is focused on Latin American consumers, often undocumented applicants who have tax identification numbers but lack Social Security numbers. And the Bankruptcy Program is designed for customers who are in Chapter 7 or Chapter 13 bankruptcy, or who have discharged a bankruptcy within six months.
Credito Real’s credit dynamics resemble those of Avid Acceptance, a Salt Lake City-based subprime lender that focuses on loans made to consumers in bankruptcy. Avid issued its inaugural auto securitization backed by $95 million worth of subprime assets in January 2018. The average credit score for the pool was 546.
Despite the fact that Avid’s average credit score is lower than Credito Real’s, other elements of Avid’s portfolio indicate better loan quality. For instance, Avid’s average loan balance was $17,285, and its weighted average interest rate was 18.1%. By comparison, Credito Real’s metrics are $13,647 and 23.5%, respectively.
Digging deeper, 3.9% of Avid’s customers lacked credit scores, compared with 27.3% for Credito Real. To that end, Credito Real’s net loss range is 24.6% to 26.6%, while Avid’s was 11.7% to 13.7%.
Those credit loss numbers translate to credit enhancement levels that are 600-900 basis points higher for Credito Real. Specifically, Credito’s securitization calls for 30.8% of credit enhancement for the Class A notes, 23.3% for the Class B notes and 15.5% for the Class C notes. Avid’s ABS deal, meanwhile, required credit enhancement levels of 24.7%, 14.3% and 6.0%, respectively, for the Class A, B and C notes, according to presale reports from Kroll Bond Rating Agency (KBRA).
Another discrepancy between the two ABS transactions relates to bankruptcy borrowers. In Avid’s debut securitization, loans made to consumers in Chapter 7 or Chapter 13 bankruptcy comprised more than 90% of the underlying assets; for Credito Real, that number was about 10%.
In some ways, bankruptcy proceedings improve a borrower’s credit situation. For instance, as KBRA wrote in the presale report for Avid’s inaugural securitization, bankruptcy borrowers have recently discharged debt, which reduces their debt burden and typically leads to better loan performance than subprime loans. In addition, borrowers in bankruptcy are restricted from filing for bankruptcy again for several years, which provides a level of assurance to the lender.
Meanwhile, many of Credito Real’s customers are immigrants or non-U.S. citizens. Though Credito Real accepts picture identification issued by non-U.S. governments, it does not verify consumers’ immigration status.
As such, while the lender’s credit models hinge on customers’ stability of residency and employment, a significant change in immigration patterns, policy or enforcement could cause some obligors to emigrate from the U.S., either voluntarily or involuntarily, or slow the flow of new immigrants to the U.S. These changes could result in increased delinquencies and losses on the receivables, or a decrease in the company’s future originations, KBRA noted.
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