The rating agency last week placed a tranche of notes under downgrade watch, noting that cumulative net losses (CNLs) rose to 27.2% compared with 13.4% during the past four months following the lender’s first downgraded issuance.
In July, Honor’s $112 million securitization was downgraded. Honor’s Class C notes — originally rated BB-, were downgraded to CCC+ and its portfolio subsequently acquired by Westlake Financial Services. On September 1, Westlake took over servicing from Honor, with S&P saying it believed servicing effectiveness deteriorated in July and August.
“It is not uncommon for servicing performance to decline when a servicer is being replaced — presumably a function of employees having less incentive once they become aware that a successor servicer is on the way,” S&P notes. As a result, many additional accounts were rolling into default status.
Westlake told S&P that Honor’s accounts have been difficult to service due to borrowers being accustomed to receiving extensions from Honor. While Westlake has provided some extensions since taking on the servicing role, the volume of extensions has been reduced from earlier levels. Westlake declined to comment further.
To that end, expected losses are likely to be higher than 30% given the “rapid acceleration” of losses in September and October — as well as Westlake’s expectation for a slower pace in November, S&P notes.
The level of speculative grade ABS outstandings is six times greater this year than it was in the lead-up to the Great Recession in 2006 — a stat that highlights why “caution is warranted” in subprime deals today, Amy Martin, senior director of structured finance at S&P Global Ratings, said in a September 19 webinar.
“Not only has ‘BB’ issuance doubled to $1.26 billion last year, but this is the first time we’re seeing B ratings (one grade lower than ‘BB’) to the level we are,” Martin said. “Year to date, we’ve rated $317 million in ‘B’ auto paper, and that exceeds all prior years from 2007 through 2017 combined.”