Longer Terms, Revolving Period Are Risk Factor in Toyota’s Latest $1B ABS Deal

Toyota Motor Credit Corp. is bringing $1.13 billion in asset-backed securities to market in the captive’s first extended-loan securitization, which is expected to close on June 19, according to a pre-sale report by Moody’s Investors Service.

TMCC’s newest deal is comprised of 54,385 prime auto loan receivables with an average FICO score of 754 and maximum original term of up to 84 months, according to Moody’s. New vehicles account for 80% of the pool, while used vehicles make up 20%.

The deal is not only the first transaction to be issued through TMCC’s extended-loan program, but the first transaction to feature a five-year revolving period as well.

Longer term lengths and the “long” revolving period are considered “credit challenges” for the transaction, Moody’s noted in its report. Unlike Toyota’s standard ABS shelf, which includes assets with a maximum original term of 72 months, TMCC’s latest deal allows for loans with an original term up to 84 months.

Longer-term prime-quality loans “generally show weaker performance than loans with shorter terms because the longer term exposes the loan to risks over a longer time horizon and increases the volatility of the expected loss,” Moody’s stated. About 29% of the statistical pool is within the 73- to 84-month original loan term bucket and about 7.7% of the statistical pool is within the 75- to 84-month loan term bucket.

Additionally, the revolving period may cause pool quality to change as “the sponsor adds new receivables to the pool over time, exposing the transaction to additional performance uncertainties,” Moody’s stated.

However, Moody’s lists the captive’s financial health and experience as credit strengths, noting that TMCC is the highest-rated captive auto finance company sponsoring auto loan-backed ABS in the U.S. Indeed, net losses in TMCC’s managed portfolio decreased to 0.49% as of year-end 2018 compared with 0.57% for the year prior. Additionally, the portfolio’s delinquencies as of year-end 2018 were 2.14%, down from 2.44%.

TMCC is a subsidiary of Toyota Financial Services.