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Subprime AutoLoan ABSUpdateAnnual Non-Prime Auto FinancingConferenceNAF AssociationFort Worth, TexasMay 31, 2018Amy MartinLead Analyst – Auto ABSSenior DirectorStructured Finance RatingsInes BeatoDirectorStructured Finance RatingsCopyright 2018 by S&P Global.All rights reserved.
Agenda Size Of The Auto Loan And Subprime Auto Loan ABS Markets Subprime Auto Finance Trends Collateral Characteristics Of Subprime Auto Loan ABS Subprime Auto Loan ABS Collateral Performance (Vintage Analysis) Comparison of Issuers To S&P’s Subprime Auto Loan Static Index New Performance Metric Subprime Auto Loan ABS Ratings Performance Outlook2
Auto ABS Issuance Generally Tracks AutoSalesU.S. Auto Sales, Auto Lease ABS Issuance and Auto Loan ABS IssuanceAuto Lease ABS Issuance ( Bil)Auto Loan ABS Issuance ( Bil)Auto Sales (Million Units)120181038814747470 Billion89878016696768735410544547498374062014.3 .7Auto Sales (Million Units)10010017.514.3 13.514.0 72006200520042003200220012000199919980Source: S&P Global Ratings3
Subprime Dollar Issuance% Of Total Retail Auto ABS 3040.0% 25.4 2535.0% 23.3 23.1 21.630.0% 20.0Billion 20 18.425.0% 17.6 16.3 1520.0% 11.6 10 11.2 11.615.0% 8.710.0% 5 2.25.0% 1.2 00.0%20062007200820092010Issuance ( )Source: S&P Global Ratings2011201220132014% of Total Dollar Issuance2015201620172017YTD*Est.2018YTD*YTD 2018 is estimated through May 31, 20184
Top 3 Subprime Issuers As a % of Subprime Auto Loan 57.6%60.0%55.0%50.0%200612007CapOne 62017Santander Santander Santander Santander Santander Santander Santander SantanderAMCARGMFinancialPrestige DriveTime DriveTime( 7.2 bn) ( 9.8 bn)( 6.7bn)( 8.8bn)GMGMGMGMFinancial Financial Financial Financial( 4.2 bn) ( 4.4 bn)GMFinancial( 4.9 bn)GMFinancial( 4.7 bn)Flagship( 1.6 bn)DriveTime( 1.9 bn)CPSExeterExeterExeter( 1.7 bn) ( 1.4 bn)Source: S&P Global Ratings5
Subprime Auto Loan ABS 201748 Transactions, 25.42BSantander & Drive,34.5%JD Byrider, 0.5%UACC, 0.6%CIGVeros, 0.7%Financial,0.7%GLS,0.7%Prestige, 1.3%First Investors, 2.4%CPS, 3.4%ACA, 3.4%GM Financial 18.6%Flagship 3.87%UACC – United Acceptance Credit CorporationCAC – Credit Acceptance CorporationCPS – Consumer Portfolio ServicesACA - American Credit AcceptanceCAC, 4.5%Exeter, 5.5%DriveTime, 7.4%Source: S&P Global RatingsOneMain, 6.1%Westlake, 5.9%6
S&P’s Take On Subprime Auto Finance Trends Credit performance remains weak despite lenders tightening their creditstandards. The industry remains intensely competitive despite subprime originationvolumes declining in 2016 and 2017. Lenders are competing on thebasis of price, quick approvals, and limited stipulations. Several subprime auto finance companies are reporting losses due tocompetitive pricing and higher loan losses, in part due to lower recoveryrates. While a few are still building scale to improve margins, othershave greatly reduced origination volumes and face liquidity concerns.Some have gone out of business, and we believe others could fail. Private equity and warehouse funding aren’t as plentiful as they wereearlier in the recovery. Investors have a growing appetite for subprime auto loan ABS. Severalissuers have issued ‘B’ rated classes this year for the first time.7
Subprime Collateral Trends (ECNL 7.5%)FICO Loan-To-Value 7.317.01711511411316.711311316.611211216.5 16.311111016.911458057518124595 594594594WAAPR 01085651065601041615.5Source: S&P Global Ratings8
Subprime Collateral Trends (ECNL 7.5%)% of Loans WithOriginal Term 60 months85.59080.7807069.0605073.677.5 76.981.3 79.2 83.4 83.3Weighted AverageOriginal Maturity7084.678.169.769.569.268.6 67.366.520661065.5065Source: S&P Global Ratings9
Vehicle Depreciation Versus Loan AmortizationAmount When amortization of the loan balance is spread out over a longer term, thepoint at which the obligor gains an equity position in the car is delayed. The point at which the vehicle's value exceeds the loan balance comes laterand later in the life of the loan as the loan term lengthens.Vehicle Value48 mth term60 mth term72 mth term78 mth term 25,000 20,000 15,000 10,000 5,000 147 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 7610
Longer-Term Subprime Auto Loans Are LeadingTo More Back-Loaded Losses Longer-term loans affect the timing of losses: losses become more backloaded and extend for a longer period of time.We observed a shift in the loss curve to 25-60-84-98-100 for the 2011vintage from 32-70-90-100 for the 2003 vintage. As the chart shows, the losscurve for the 2011 vintage is slower and longer, and its losses extend intoyear five.Yearly Vintage Loss Curve100%80%60%40%20%0%13579 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 532003 Vintage2011 Vintage11
Subprime Auto Loan ABS PerformanceS&P’s Subprime Auto Loan Static Index - Cumulative Net Losses(%) By Vintage16.002008Cumulative Net Loss Q1 20176.004.00Q2 20172.000.001Source: S&P Global 0112012201420152016Q1 2017Q2 201737394143201312
Subprime Auto Loan ABS PerformanceModified Subprime Auto Loan Static Index - Cumulative Net Losses(%) By Vintage16.002008Cumulative Net Loss (%)14.00201412.00201510.002015 modified8.002016Q1 20176.002016 Modified4.00Q2 2017Q1 2017 Modified2.00Q2 2017 Modified0.001Source: S&P Global Ratings35720082016Q2 2017911131517192120142016 ModifiedQ2 2017 Modified232527292015Q1 2017313335373941432015 ModifiedQ1 2017 Modified13
Modified Subprime Cumulative Recoveries 1 2017Q2 201730.0025.0020.001420137201410132015 (i)161920162225Q1 2017283134Q2 2017Source: S&P Global Ratings14
2015 Cumulative Net Losses by Issuer - Subprime40Subprime Index - 2015American CreditAcceptance35JD rican Credit st lakeFirst InvestorsAmeriCreditJD Byrider(CarNow)Subprime ce: S&P Global Ratings15
2016 CNLs by Issuer - Subprime30Subprime Index - 2016American CreditAcceptanceAmeriCreditJD Byrider25JD irst water10ExeterPrestigeTidewaterSubprime Index 57911131517SierraFirst 21232527DriveTimeSource: S&P Global Ratings16
Q1 2017 CNLs by Issuer - Subprime14DrivetimeSubprime Index - Q1 201712American Credit AcceptanceAmerican Credit keSantander(SDART)6ExeterExeterFirst InvestorsSubprime IndexFlagshipFirst InvestorsCPS4FlagshipSantander(SDART) incl. not ratedWestlakeDriveTimeAmeriCredit2Months1Source: S&P Global Ratings357911131517
Performance AnalysisCNL Is Only One FactorCumulative Net Loss (CNL)% of Original Collateral Remaining(Pool Factor)16%14%12%Pool FactorCNL10%8%6%4%2%0%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 27MonthWestlake Automobile Receivables Trust 2016-1Exeter Automobile Receivables Trust 2016-1CPS Auto Receivables Trust 2016-A100%90%80%70%60%50%40%30%20%10%0%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 27MonthWestlake Automobile Receivables Trust 2016-1Exeter Automobile Receivables Trust 2016-1CPS Auto Receivables Trust 2016-A18
Pool Factor AnalysisCumulative Net Loss Relative to Orig. Collateral Outstanding(Pool Factor)Westlake Automobile Receivables Trust 2016-1Exeter Automobile Receivables Trust 2016-1CPS Auto Receivables Trust 2016-A16%14%12%Exeter 11%CPS 10%8%CNL10%Westlake 8%6%4%2%0%100%90%80%70%60%50%40%30%20%10%0%Pool Factor19
Subprime Auto Loan Rating 5702015169020162440201722202018 YTD (as of May 22)12701,0970Total*The upgrades/downgrades do not include those based on rating changes on the bond insurer, if any. All rating actions in the table are credit-related.20
S&P’s Subprime Auto Finance Outlook Losses will remain under pressure due to lower used vehicle values. Higher interest rates will inflate funding costs and squeeze profit margins. Providers of capital, including warehouse lenders, have become moreselective. We’re late into the credit cycle. As we’ve seen before, after several yearsof loan growth and competition-induced weaker lending standards, creditlosses rise and some companies fail. Consolidations and portfolio sales are likely to increase. History hasshown that auto loan portfolios can be successfully transitioned. Auto loan ABS ratings outlook is stable, but subprime non investmentgrade classes may incur downgrades. The ‘BB’ and ‘B’ rated classeshave lower loss-absorbing cushions and mild deterioration could result indowngrades.21
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When amortization of the loan balance is spread out over a longer term, the point at which the obligor gains an equity position in the car is delayed. The point at which the vehicle's value exceeds the loan balance comes later and later in the life of the loan as the loan
