SAFCO Debuts Automotive ABS, Raising $118.8M

Southern Auto Finance Company is preparing its first auto loan asset-backed securities (ABS) transaction, through the SAFCO Auto Receivables Trust, 2022-1, to raise $118.8 million in the capital markets.

SAFCO is an indirect auto finance company founded in 1990 that specializes in auto finance for first-time buyers, as well as consumers looking to rebuild credit or those whose income is difficult to verify, according to ratings agency Kroll Bond. .

Capital One Securities is the original purchaser of the Notes, for which Systems & Services Technologies will act as terminator of the Notes. SAFCO will issue the Notes through three classes via a sequential payment structure, where Class A Notes receive principal payments before any subordinate Notes. After Class A tickets are fully paid, Class B tickets will be fully paid, then Class C.

The ratings benefit from several forms of credit enhancement, apart from its senior-subordinated structure. Overcollateralization — initially 5.00%, and increasing to a target of 14.7% of the current debit balance; a cash reserve account which will equal approximately 1.50% of the initial debit balance and an excess spread of approximately 9.26%.

Although the notes benefit from credit enhancements, the rating agency raised a number of issues that could negatively impact the notes, such as higher loan-to-value ratios and recoveries in the current car market. second hand.

Ongoing supply constraints, caused by production delays as a result of the COVID-19 pandemic, along with strong demand for vehicles, drove up wholesale used car prices through the second quarter of 2022. Such terms create the potential for lower recovery rates on defaulted warranties if used car pricing returns to historic levels.

“Borrowers with high LTV loans take longer to build equity in vehicles, compared to a loan with a lower LTV, which increases the risk that a borrower will default due to their equity position. negative,” according to the KBRA report.

These concerns are heightened, given that used vehicles make up 89.02% of the warranty pool. New vehicles make up 10.98% of the pool, according to KBRA.

KBRA has a mixed view of SAFCO’s long-standing imputation policy. A receivable must be 181 days past due, KBRA said, which is long compared to other auto lenders. At the transaction level, however, the requirement is stricter and a receivable is considered debited if it remains 121 days past its due date or more.

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 initial terms of 67 months and a seasoning of 14 months.

KBRA Plans to Assign “AA” Ratings to $96.5 Million Class A Notes; “A” on $8.0 million Class B notes and “BBB” on $14.2 million Class C notes.