Southern Auto Finance Company is preparing its first asset-backed securities (ABS) auto loan deal through the SAFCO Auto Receivables Trust, 2022-1, aimed at raising $118.8 million from the capital markets.
SAFCO is an indirect auto finance company founded in 1990 and specializes in auto finance for first-time buyers and consumers looking to rebuild their credit ratings or whose income is difficult to verify, according to the Kroll Bond Rating Agency.
Capital One Securities is the first purchaser of the Notes, for which Systems & Services Technologies will act as backup servicer of the Notes. SAFCO will issue the Notes in three classes through a sequential payment structure, with the Class A Notes receiving principal payments before any subordinated notes. After the class A banknotes are fully paid, the class B banknotes are fully paid and then the class C banknotes.
The Notes benefit from several forms of credit enhancement in addition to their senior subordinate structure. Overcollateralization – initially 5.00% and increasing to a target of 14.7% of the current claim balance; a cash reserve account equal to approximately 1.50% of the initial receivable balance and an excess margin of approximately 9.26%.
Although the Notes will benefit from credit rating improvements, the rating agency has addressed a number of issues that could potentially negatively impact the Notes, such as: B. higher loan-to-value ratios and recoveries in the current used car market.
Continued supply shortages caused by post-COVID-19 production delays and high demand for vehicles had pushed up wholesale used vehicle prices through the second quarter of 2022. Such conditions create the potential for lower recovery rates for defaulted collateral as used car prices return to historic levels.
“Borrowers with high-LTV loans take longer to build equity in the vehicles compared to a loan with a lower LTV, increasing the likelihood that a borrower will default due to their negative equity position,” according to the KBRA report.
These concerns are compounded when you consider that used cars make up 89.02% of the collateral pool. New vehicles make up 10.98% of the pool, according to KBRA.
KBRA has mixed views on SAFCO’s long charge-off policy. A claim must be 181 days past due, KBRA said, which is long compared to other auto lenders. However, at the transaction level, the requirements are more stringent and a receivable is considered settled if it is 121 days or more past its due date.
On average, the loans have a balance of $15,201, while on a weighted average (WA) basis, the loans have an interest rate of 19.64%, a FICO score of 554, and a loan-to-value ratio of 108.4%. Also on a WA basis, the loans have an original term of 67 months and a maturity of 14 months.
KBRA Expects to Assign Ratings of ‘AA’ to the $96.5 Million Class A Notes; ‘A’ on the $8.0 million Class B bills and ‘BBB’ on the $14.2 million Class C bills.