Florida Lender Preps Risky Subprime Auto Bond

A U.S. affiliate of Mexican consumer-finance giant Crédito Real is marketing a rare subprime auto bond backed by unconventional collateral including loans to recently bankrupt consumers and undocumented borrowers.

It’s the first time in its 14-year history that the firm will seek to tap the asset-backed securities market, which has for decades bundled consumer loans into securities for sale to Wall Street. It’s been a funding source that allows companies to offload debt, while generating cash to originate new loans.

“This is not very common within ABS deals,” said Clayton Triick, a portfolio manager at Angel Oak Capital Advisors. “The deal is interesting but definitely requires an extra risk premium for multiple reasons.”

Fort-Lauderdale based Crédito Real USA Finance is selling $130.8 million of securities with top grades of single-A by Kroll Bond Rating Agency, according to a person familiar with the matter. Wells Fargo & Co. is managing the deal, which is expected to price next week.

Representatives for Crédito Real USA and Wells Fargo didn’t immediately reply to requests for comment.

Florida Lender Preps Risky Subprime Auto Bond

Some of the loans backing the deal, which the company originates under a program called Vamos, may include applicants without Social Security numbers, but who have tax identification numbers and either positive or no credit history. Some of these clients have no FICO scores.

“Crédito Real does not verify the immigration status of its customers, which is not required by law,” Kroll said in a presale report this week. This could be a drag on the transaction because a significant change in immigration policy or enforcement “could cause some obligors to emigrate from the U.S., either voluntarily or involuntarily.”

About 66% of the loan pool are from the company’s traditional subprime auto finance program, geared toward customers with limited or negative credit history, while 19% are from car dealers that market to the Latino community, according to Kroll. A further 10% of the deal’s collateral is from a third program designed for customers who are in an open Chapter 7 or Chapter 13 bankruptcy or have discharged a bankruptcy within 6 months.

Initial price thoughts on the senior single-A notes were in the low to mid-100s basis points area, over the eurodollar synthetic forward benchmark, the person familiar said. That’s considerably wider, or more expensive for the borrower, than where other subprime-auto ABS programs such as Santander, Westlake, and United Auto price their Single-A tranches. For example, a recent Santander deal sold its single-A slice at 65 basis points over a swaps benchmark.

ESG Credit?

The borrowers in the deal have a FICO score of 558 and the loans have an loan-to-value of nearly 140% on average, meaning that many owe more than their vehicles are worth, Kroll said. The weighted average coupon, which roughly corresponds to the average percentage rate, or APR charged to customers, is about 23.5%.

Given the risk profile and the fact it’s an inaugural ABS issuer, some investors are skittish.

“We don’t normally participate in new deep-subprime issuers without any track record,” said John Kerschner, head of securitized products at Janus Henderson.

However, on the positive side, the transaction may qualify for environmental, social and governance credit due to its social impact of extending credit to underserved communities.

“Further analysis would be required, but there could be positive ESG factors within the social aspects of consumer credit, helping to serve borrowers outside of traditional lending channels,” said Angel Oak’s Triick.

Moreover, the deal benefits from the company’s $100 million credit facility provided by Wells Fargo Bank, AXOS Bank, and Pacific Western Bank, as well as strong credit cushions built into the structure to protect senior note holders, he said. The loans were geographically diverse as well -- another positive.

Credito Real USA Finance was formerly known as AFS Acceptance, which was started in 2007. The Mexican specialty-finance company Credito Real acquired 65% of the equity of the company in 2015, and the U.S. branch rebranded and changed its name in 2018 to match its parent.

Relative Value: CMBS

  • Deutsche Bank AG analysts like junior AAA and AA conduit CMBS at current spreads, according to a Wednesday research note
  • Single-A conduits, however, are “fully valued”, while BBB- bonds look rich given Covid loss uncertainty

Quotable

“I think it’s too early to have much confidence in a rapid rebound in NY office/commercial property,” said Chris Sullivan, chief investment officer of United Nations Federal Credit Union. “Valuations are lower by about 16% on average and rents are lower, and sublease activity has exploded. Much will depend on how quickly commuters and other office workers are comfortable returning (or inclined to return) to Midtown and Downtown office towers, and so far that has only been a trickle -i.e., about 10%,” he said.

“Some city workers will be forced to return and some companies other than tech - finance primarily - will implement some type of rotational plan, but it appears that the gradual return of office workers will play out over several years and no one knows if occupancy will then achieve anywhere near its previous levels.”

What’s Next

ABS deals in the queue for next week include CoreVest (single-family rental), Credito Real (subprime auto), American Credit Acceptance (subprime auto), GM Financial (auto lease), Hyundai Capital America (prime auto), and Donlen (fleet lease ABS).

©2021 Bloomberg L.P.

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