Hyundai Capital America’s (HCA) third auto loan asset-backed securities (ABS) deal is the first S&P Global-rated public auto loan ABS to include a floating rate indexed to the Federal Reserves’ Secured Overnight Funds Rate (SOFR), a frontrunner for replacing the Libor benchmark when the latter begins to phase out in 2022.
The $1.5 billion transaction’s A-2 notes, rated triple AAA by S&P and Fitch Ratings, was split into two tranches, A-2a and A-2b, representing a principal balance of $399.5 million and $100 million, respectively. HCA previously utilized one-month Libor in transactions that included a floating rate.
Looking closer at HCA’s deal structure, the A-2a tranche was benchmarked to the Eurodollar Synthetic Forward Curve (EDSF) rate, and the A-2b tranche was indexed to SOFR, plus a spread, according to an S&P presale report. SOFR-indexed notes included in the A-2b tranche could constitute up to 30% of the total class A-2 notes.
The coupon, or the annual interest payment on a bond or security, for the A-2b tranche were based on a compounded 30-day average SOFR, plus a 20-basis point (bps) spread to account for the total credit risk of the transaction, according to S&P.
The transition away from Libor has been years in the making and was initially set for 2021, but the shift was halted by the COVID-19 pandemic as economic uncertainty mounted in early 2020. The Fed in April laid out its path for securitized issuers to transition away from Libor, and in September Ford Motor Co. utilized SOFR when it refinanced three revolving credit facilities.
Meanwhile, HCA’s auto portfolio grew in the first half of 2021, according to the presale report. Oustandings as of June 30 rose 44% year over year to $26.7 billion, largely due to strong Hyundai and Kia sales and increased loan origination volume. Total delinquencies for the first six months of 2021 clocked in at 1.24% of the portfolio, down from 2.05% when compared with the same reporting period last year. Net charge-offs also decreased 83 bps to 0.57%, despite an increase in the lender’s managed portfolio.