American Credit Acceptance faces pressure in ABS deal

American Credit Acceptance ’s latest subprime asset-backed securitization provides a glimpse into the pricing pressure lenders face when leveraging capital markets as a funding avenue. Investor confidence has dampened since the coronavirus pandemic rattled financial markets and unemployment levels reached 14.7%, a figure not seen since World War II. As a result, issuers have had to sweeten the deal through increased credit enhancement to help insulate the deals against potential future losses. In fact, spreads — the difference between the interest received by the issuer and interest paid to the investor — have widened across all of ACA’s tranches, from its highest-rated bonds, triple-A, to its lowest-rated bonds, double-B tranche. Most notably, spreads were wider by 545 basis points in its double B tranche compared with the lender’s previous Feb. 3 ABS deal. The latest deal requires ACA to pay investors in the double B tranche 745 basis points of yield. In its previous issuance, ACA was paying 200 basis points in the same tranche, according to Finsight. ACA also omitted the riskiest tranche, single B, from its latest securitization, resulting in a smaller deal. By comparison, the Spartanburg, S.C.-based lender’s most recent securitization clocked in at $288 million, compared with its $362 million February deal. The overcollateralization target rate — a form of credit enhancement that builds over time as obligations get paid out — increased to 29% from 12% in the previous securitization, according to a presale report released by S&P Global Ratings . All in, that means ACA will end up setting aside $83.5 million in collateral to cover potential losses as the lender pays down investors. In its February deal, overcollateralization accumulated to $43.4 million. Similarly, the reserve account — a flat amount as a percentage of the initial pool balance that the issuer has to set aside to account for losses — doubled to 2% of the initial pool balance, compared with 1% from its February transaction. Putting that into perspective, the reserve account for its latest securitization was $5.8 million, compared with the $3.6 million reserve for the previous deal earlier this year. This excess credit enhancement is a result of the increase in cumulative net loss expectation, which rose to 32.5%, according to S&P. By comparison, S&P’s CNL expectation for ACA’s February deal was 27.3%. Increasing loss expectations for ACA’s second deal of the year is a result of the impact from coronavirus unemployment levels. Historically, there is a direct correlation between credit performance and unemployment levels, S&P noted. ACA’s managed portfolio for the three months ended March 31 amounted to $3.42 billion, up from $2.68 billion year over year.

American Credit Acceptance faces pressure in ABS deal

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