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'Flight to quality' emerges in auto ABS market

has brought its fourth 2016-vintage auto loan securitization to market in an environmentsaid to be characterized by a flight to quality.

A preliminaryprospectus filed April 28 details the $1.21 billion Santander Drive Auto ReceivablesTrust 2016-2, a securitization backed by a pool of subprime auto loans. It is thesecond Santander Consumer-linked ABS deal to date in the second quarter, followingthe recently completed Chrysler Capital Auto Receivables Trust 2016-A. SantanderConsumer also completed one ABS deal on its deeper-subprime Drive Auto ReceivablesTrust platform during the first quarter.

"Ourthree distinct ABS platforms remain competitive," CFO Ismail Dawood said duringan April 27 conference call."We've demonstrated our ability to place assets across a broad investor base,evidencing consistent and diversified access to liquidity during the first quarter."

At thesame time, Dawood said the company had witnessed wider spreads, particularly inthe more subordinated tranches of deals, resulting in an estimated 30-basis-pointincrease in its cost of debt.

"Oneof the ways we are mitigating some of the headwinds, especially when it comes tospread-widening, is what we [did] with the [Chrysler Capital] transaction, wherewe have the flexibility to retain certain securities so that we are not paying anabove-market rate of interest on our debt," Dawood added.

The April28 prospectus indicates that a Santander Consumer affiliate plans to retain or privatelyplace the most junior piece of Santander Drive Auto Receivables Trust 2016-2, the$67.4 million in class E notes, consistent with past deals. Terms of the privatelyplaced Chrysler Capital deal are not available, but Dawood said the company decidedto retain the residual piece, given market conditions, rather than sell it.

CEO JasonKulas said the company has also had some success in passing along a portion of thehigher cost of funds through the pricing of its auto loan originations.

"Thereis a differentiation by tranche within the deal," he said. "There's alsoa differentiation by seasoning of issuer, and I think we're benefiting from thaton a relative basis." Or, as Dawood described it, a flight to quality.

Charles Bradley Jr., chairman, president and CEO of subprimeauto lender Consumer Portfolio ServicesInc., offered similar observations about market conditions during anApril 26 call.

"The price and cost of funds has gone up significantly overthe last few quarters," he said, according to a transcript of his remarks. "It's certainly a differentworld than a year ago in terms of what it cost to get securitization done. Havingsaid that, it's not likeyou can't get one done. It's more like, it's just going to be a little more expensive."

Likehis peers at Santander Consumer, Bradley reported that the company has been seeing"lots of interest" in the senior-most tranches of its ABS offerings ina reversal of market conditions a year ago, when the more subordinate pieces hadbeen attracting "lots of orders."

"So,certainly, the word on the street is a flight to quality," Bradley said. "Sowhat we're starting to hear in the world is it's probably going to affect a lotof people a lot more than it might affect CPS. So that's a good thing. We don'treally want the higher cost of funds, but we certainly knew at some point that we'llget back to the historical levels."

CPS closeda securitization, the$332.7 million CPS Auto Receivables Trust 2016-B, in April. It a $329.5 million deal in January.

CFO JeffreyFritz said the latest transaction had 22 unique investors, up from 19 in the previousdeal. Eight of the investors were new. He also reported that the class A and B piecesof five-class structure had been oversubscribed.

"Soit's very interesting that even though the cost of funds are rising, it's not indicativeof [a] lack of liquidity and activity in these markets," Fritz said. He addedthat the bifurcation of investor demand between the senior and subordinated bondsrepresents a dynamic that has not been limited to subprime paper.

, which operatesprime and near-prime auto ABS programs, may also be a beneficiary of a flight toquality.

"Thereis no doubt that the markets have been choppy since the end of last year, whichhas created some tiering among issuers," CFO Christopher Halmy said duringan April 26 call. "However,the ABS market has been very receptive to Ally's securitizations as you can seefrom the spreads we've been paying on recent transactions."

A accompanyingthe call showed that spreads on the tranches of the three most recent completeddeals on the Ally Auto Receivables Trust platform that the company sold had essentiallyremained steady. Halmy attributed Ally's ability to complete $5.4 billion in newsecured funding during the first quarter to having "a mature and crediblesecuritization program."

,which like Santander Consumer is a highly seasoned issuer of subprime auto ABS,said it plans to remain active in the market. Its AmeriCredit Automobile ReceivablesTrust platform has two securitizations to its credit to date in 2016, most recentamong them a $1.20 billion transaction that closed in mid-April. Spreads on theAAA-rated tranches of that transaction narrowedslightly relative to the platform's two previous deals.