Subprime Auto Amy Martin Lead Analyst – Auto ABS Senior ...nafassociation.com/pdf/2017_Sub-Prime_ABS_Martin.pdf · S&P-Rated IG Subprime Auto Loan ABS Are Well Protected 14 •

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Subprime Auto Loan ABS Update Annual Non-Prime Auto Financing Conference NAF Association

Copyright © 2017 by S&P Global. All rights reserved.

Plano, Texas June 1, 2017

Amy Martin Lead Analyst – Auto ABS Senior Director Structured Finance Ratings


Agenda

2

•  Size Of The Auto Loan And Subprime Auto Loan ABS Markets

•  Subprime Auto Finance Trends

•  Collateral Characteristics Of Subprime Auto Loan ABS

•  Deterioration In Subprime Auto Loan ABS Collateral Performance (Vintage Analysis)

•  Comparison of 18 Issuers To S&P’s Subprime Auto Loan Static Index

•  Subprime Auto Loan ABS Ratings Performance Remains Stable

•  Outlook


Auto ABS Issuance Tracks Auto Sales

3

Source:S&PGlobalRa6ngs

4.4 4.5 3.2 2.3 3.4 1.7 4.7 6.8 14.3 13.3

5.1 8.5 8.3 9.7 10.7

14.0 15.9 17.5 14.3 15.2

37

54

70

88

100

87

74

103

89

74

54

45 47 49

67 61

69 68 67 70

0

2

4

6

8

10

12

14

16

18

0

20

40

60

80

100

120

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Est

Aut

o S

ales

(Mill

ion

Uni

ts)

$ B

illio

n

U.S. Auto Sales, Auto Lease ABS Issuance and Auto Loan ABS Issuance

Auto Lease ABS Issuance ($ Bil) Auto Loan ABS Issuance ($ Bil) Auto Sales (Million Units)


Subprime Dollar Issuance

4

% Of Total Retail Auto ABS

$21.6

$16.3

$2.2 $1.2

$8.7

$11.6

$18.4 $17.6

$20.0

$23.3 $23.1

$7.9

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

$0

$5

$10

$15

$20

$25

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD

Bill

ion

$

Issuance ($) % of Total Dollar Issuance



Top 3 Subprime Issuers As a % of Subprime Auto Loan ABS

5 Source:S&PGlobalRa6ngs

67.1%

72.1%

100.0%

90.6%

95.3%

89.7%

79.2%

73.7%

65.3%66.8%

57.6%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20161 CapitalOne AMCAR AMCAR AMCAR Santander Santander Santander Santander Santander

($7.2bn)Santander($9.8bn)

Santander($6.7bn)

2 AMCAR CapitalOne CPS DriveTime AMCAR GMFinancial

GMFinancial

GMFinancial

GMFinancial($4.2bn)

GMFinancial($4.4bn)

GMFinancial($4.9bn)

3 HSBC DriveSantander

CAC Pres6ge DriveTime DriveTime CPS Exeter Exeter($1.7bn)

Exeter($1.4bn)

Flagship($1.6bn)


Subprime Auto Loan ABS 2016

6

46 Transactions, $23.07B

Honor, 0.4%

JD Byrider, 0.5%

Sierra, 0.6%

Tidewater, 0.7%

GLS, 0.9%

UACC, 1.4%

First Investors, 1.9%

Prestige, 2.8%

OneMain, 3.0%

CAC, 3.0%

ACA, 3.7%

Exeter, 4.8%

CPS, 5.2%

DriveTime, 6.6% Westlake, 7.0%

Flagship & CarFin, 7.1%

GM Financial, 21.2%

Santander & Drive, 29.2%

UACC–UnitedAcceptanceCreditCorpora0onCAC–CreditAcceptanceCorpora0onCPS–ConsumerPor6olioServicesACA-AmericanCreditAcceptance



Subprime Auto Finance Trends

7

•  Industry has remained intensely competitive. In response some lenders liberalized their credit standards, loosened verification requirements (POI), and lowered their pricing requirements. •  Looser credit policies and lower discounts were competitive responses

during prior intensely competitive periods. In our view, foregoing income verifications to the magnitude that has been reported in Reg AB II loan level filings started only 2.5 years ago and is isolated. Large lenders are using a risk-based approach to POI.

•  Loan losses have increased for 2015 and 1st half 2016 originations. Lower recovery rates have contributed to higher losses too.

•  Lender profitability weakened in 2015 and 2016 with some reporting losses.

•  More recently, some lenders have started to self-correct and are tightening their lending standards.


Subprime Collateral Trends (ECNL >7.5%)

8

120 121

114

112 112 113

114 115 113

112

110

104

106

108

110

112

114

116

118

120

122

124

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Q1

Loan-To-Value (%)


594 594 594

574 575 573

577 577

572 574 575

560

565

570

575

580

585

590

595

600

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Q1

FICO®

16.3

16.7 16.6

17.8

16.3

17.0

16.6 16.7

17.3

16.8

17.5

15.5

16

16.5

17

17.5

18

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Q1

WAAPR (%)


Subprime Collateral Trends (ECNL >7.5%)

9

69.0

80.7 85.5

73.6 77.5 76.9

81.3 79.2 83.4 83.8 84.5

0

10

20

30

40

50

60

70

80

90

% of Loans With Original Term > 60 months


66.9

69.2

69.7

68.0

67.4 67.1

68.0

67.3

68.6

67.9

68.9

65

65.5

66

66.5

67

67.5

68

68.5

69

69.5

70

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1

Weighted Average Original Maturity


Subprime Auto Loan ABS Performance

10

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

Cum

ulat

ive

Net

Los

s (%

)

Subprime Cumulative Net Losses (%) By Vintage

2008 2009 2010 2011 2012 2013 2014 2015 Modified 2015 Q1 2016 Q1 2016 Modified Q2 2016

2010

2011

2009

2008

2012

2014

2015

Q1 2016

Modified 2015

Q1 2016 Modified



Modified Subprime Cumulative Recoveries (%)

11


2013

2014 2015

Q1 2016

Q2 2016

Q3 2016

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

1 4 7 10 13 16 19 22 25 28 31 34

Mod

ified

Sub

prim

e C

umul

ativ

e R

ecov

erie

s (%

)

2013 2014 2015 (iv) Q1 2016 (i) Q2 2016 (ii) Q3 2016 (iii)

(


2015 Cumulative Net Losses by Issuer - Subprime

12


SubprimeIndex

AmericanCreditAcceptance

AmeriCredit

CarFinance

CPS

Drive

Exeter

FirstInvestors

Flagship

Pres6ge

SDART

UACC

Westlake

JDByrider(CarNow)

-

5

10

15

20

25

30

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Percen

t

Months

SubprimeIndex-2015


AmeriCredit

CarFinance

CPS

Drive

Exeter

FirstInvestors

Flagship

Pres6ge

Santander(SDART)

UACC

Westlake

JDByrider(CarNow)


2016 Q1 CNLs by Issuer - Subprime

13


SubprimeIndex

ACA

AmeriCredit

CPS

Drive

Exeter

FirstInvestorsFlagship

Tidewater

Pres6ge

SDART

UACC

Westlake

DriveTime

-

2

4

6

8

10

12

14

16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Percen

t

Months

SubprimeIndex-Q12016


AmeriCredit

CPS

Drive

Exeter

FirstInvestors

Flagship

Tidewater

Pres6ge

Santander(SDART)incl.notrated

UACC

Westlake

DriveTime


S&P-Rated IG Subprime Auto Loan ABS Are Well Protected

14

•  ‘AAA’ credit enhancement levels are high, often covering cumulative defaults of 85%-95% (with recovery rates ranging from 30% to 40%).

•  Auto loan ABS delever quickly and c/e levels as a % of the o/s collateral grow due to the sequential nature of the deals.

•  C/E levels have risen in line with higher ECNLs (see chart)

•  We’ve been selective when deciding which issuers we can assign ratings to and whether we should cap those ratings given operational concerns.

•  Our rating sensitivity criteria prevents us from assigning ‘AAA’ and ‘AA’ ratings if they would be downgraded under a ‘BBB’ moderate stress below ‘AA’ and ‘A’, respectively, over 1 year and below ‘BBB’ and ‘BB’, respectively, over 3 years.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

AAAC/E&ECNLExpecta0ononS&PRatedTransac0ons

AAA'ini6alC/EAAA'break-evenWAOriginalECNL(thosew/AAA)


Subprime Auto Loan Rating Actions*

15

Year Upgrades Downgrades

2004 6 0

2005 0 0

2006 4 0

2007 13 0

2008 5 0

2009 29 0

2010 4 0

2011 34 0

2012 50 0

2013 133 0

2014 57 0

2015 169 0

2016 244 0

YTDMarch31,2017 34 0

Total 782 0*Theupgrades/downgradesdonotincludethosebasedonra6ngchangesonthebondinsurer,ifany.Allra6ngac6onsinthetablearecredit-related.


Subprime Auto Finance Outlook

16

•  Lower used vehicle values will continue to put upward pressure on losses. •  Higher interest rates will impact borrowing costs and squeeze profit margins. •  Providers of capital, including warehouse lenders, will become more selective.

Private equity investors are nearing the end of their holding periods and are looking for exit strategies.

•  Consolidations and portfolio sales are likely to increase. History has shown us that these portfolios can be successfully transitioned.

•  2017/2018 will test whether lenders increase/decrease their use of risk-based income verifications. Reg AB II loan level reporting for public auto loan ABS has focused attention on this topic.

•  Consumer regulatory oversight by various federal and state agencies could result in legal actions and monetary settlements against companies in this industry.

•  Despite negative headwinds, THE SKY IS NOT FALLING. Historically after several years of loan growth and competition-induced weaker lending standards, credit losses rise and some companies fail. Well-managed companies tighten lending standards, secure adequate funding/liquidity, manage costs, focus on collections, remain compliant with all laws, and prepare for a rainy day.


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Documents

Subprime Auto Amy Martin Lead Analyst – Auto ABS Senior ...nafassociation.com/pdf/2017_Sub-Prime_ABS_Martin.pdf · S&P-Rated IG Subprime Auto Loan ABS Are Well Protected 14 •