Subprime auto loans secure US Auto Finance’s latest auto ABS of $232.8 million

US Auto Finance is hitting the market with its first term securitization for 2022, and its fourth overall, with a $232.8 million deal expected to close later this month. Subprime auto loans, issued mostly to customers with little or no credit history, will secure the collateral pool.

Despite the economic downturn resulting from the COVID-19 pandemic, the 30-year-old company has been profitable in 2020 and 2021, and appears to be financially stable, with ample liquidity and funding sources, according to ratings agency Kroll Bond. As of March 31, 2022, US Auto Finance had total assets of $891 million and equity of approximately $143 million.

The specialty auto lender also has diversified funding sources, thanks to two auto loan warehouses with two financial institutions. It has a total borrowing capacity of $350 million, and at the end of March the company had unused committed storage capacity of about $143 million, according to the KBRA.

BNY Mellon Trust of Delaware is the owner trustee and trustee of the grantor trust under the agreement, which will issue notes through a senior subordinated structure backed by an overcollateralization, cash reserve account and spread surplus, KBRA said.

The trust will repay notes to Class A first, until all notes in the transaction receive their principal payments, the rating agency said. The notes will receive an initial overcollateralisation of 18.5% of the initial pool balance and will reach a target of 23.5%, according to the report.

The transaction also features a cash reserve account, which is non-declining and equal to 2.0% of the initial pool balance, according to the report. Moreover, the excess spread is around 6.7%. On a weighted average (WA) basis, the contract rate is 17.8%, less an assumed WA coupon note of 7.2%.

Borrowers in the underlying collateral pool had a weighted average FICO score of 518, as the loans had a WA loan-to-value ratio of 151.4%. KBRA cites higher LTV as a credit risk in this agreement because borrowers with higher LTVs take longer to build up equity in the vehicle, which increases a borrower’s likelihood of default due to the debtor’s negative equity position.

KBRA plans to assign an “AA” rating to the $106.1 million Class A Notes and an “A” rating to the $34 million Class B Notes. The ratings of the subordinate classes of notes will range from “BBB” on the $40.4 million Class C Notes to “B-” on the $25.2 million Class E Notes.