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Recent ABS deals show that not all subprime auto paper is created equal

Twosubprime auto ABS deals that have recently come to market show the relativelywide range of loan characteristics associated with the highly scrutinized assetclass.

,which can lay claim to the mantle of the subprime auto market's most highlyseasoned issuer based on the 91 subprime deals to its credit since 1994,created a deal with a value proposed to range between $1 billion and $1.20billion where the class A notes maintain total initial credit enhancement of35.2%. DriveTime Automotive Group Inc., itself no stranger to securitizationbased on its 54 subprime auto ABS deals since 1996, has constructed a $300million transaction with total initial hard credit enhancement at the AAA levelof 65%.

Standard& Poor's Ratings Services, which has issued preliminary ratings to bothtransactions, set expected net loss ranges of between 9.75% and 10.25% forAmeriCredit Auto Receivables Trust 2016-2, and between 29% and 30% forDriveTime's DT Auto Owner Trust 2016-2.

S&PRatings and Global Market Intelligence are owned by McGraw Hill Financial Inc.

Thetwo subprime lenders operate distinct business models. In addition to itsrapidly expanding pursuits as a captive auto finance company for GeneralMotors, GM Financial, now more than five-and-a-half years removed from itssale to theautomaker, continues to operate a legacy AmeriCredit business through which itprovides subprime auto financing on an indirect basis through auto dealers.DriveTime operates a chain of buy-here, pay-here used car dealerships,operating in what is generally classified as the deep subprime part of thebusiness.

AmeriCreditAuto Receivables Trust 2016-2 is backed by a pool with a weighted-averageborrower credit bureau score of 574, according to a prospectus supplement filedMarch 31 with the SEC, and assuming the presence of a $1.31 billion pool tosupport notes with an initial principal balance at the high end of theprospective range. The weighted-average annual percentage rate on theunderlying loan pool is slightly more than 12.1%. DT Auto Owner Trust 2016-2'snon-zero weighted-average borrower credit score is 541; borrowers accountingfor about 21% of the pool have no credit score at all. The underlyingreceivables have a weighted-average annual percentage rate of nearly 20.4%.

Thecomposition of the AmeriCredit Auto Receivables Trust 2016-2 pool also reflectsthe GM Financial business model. The total aggregate principal balance of allnew GM vehicles accounts for approximately 38% of the $1.31 billion pool, withloans originated under the automaker's subvention programs, under which itoffers incentivized financing to consumers, representing approximately 27% ofthe pool. Loans on new vehicles of all makes and models account for 53.2% ofthe pool.

Theinitial class A credit enhancement, according to S&P Ratings, includes5.75% initial overcollateralization, a 2% reserve account and subordination of27.45%. The initial overcollateralization and subordination amounts representincreases of 25 basis points apiece from the platform's first 2016 transaction.S&P Ratings' expected net loss range is lower than that it assigned to thethree previous AmeriCredit Auto Receivables Trust deals in that the ratingagency said the newest pool is approximately 13% comprised of collateral fromearlier transactions that had been "cleaned up." Its expected loss onAmeriCredit Auto Receivables Trust 2016-1 ranged from 10.10% to 10.60%. Therating agency also said that it accounted for a variety of additional factors,such as the better-than-expected performance of the sponsor's outstandingsecuritizations and expectations for a slight decline in recovery values onrepossessed vehicles in 2016.

"AmeriCredit'soutstanding 2011-2015 transactions are performing significantly better than itspaid-off 2006-2008 transactions, which we believe is primarily because thecompany tightened its underwriting standards during late 2008 through 2010,"S&P Ratings wrote in its presale report.

"Webelieve improved economic conditions, including higher used vehicle values, andthe growing mix of new vehicles … have also contributed to lower losses,"the rating agency added.

Forthe DriveTime deal, S&P Ratings said that the initial credit enhancement atthe class A level included subordination of 37.25%, overcollateralization of26.25% and a 1.50% reserve account. The enhancement levels are in line withthose associated with the company's first 2016-vintage deal, the rating agencysaid. So, too, is its range of expected losses. DBRS set a base-case expectedcumulative net loss of 29.25% in its presale report on the transaction.

S&PRatings reported that DriveTime's cumulative net losses on DriveTime's paid-offsecuritizations from the 2000 through 2012 vintages ranged from a low of 16.90%to a high of 35.05%.

"Losseshave risen in DriveTime's outstanding securitizations [from lows achieved indeals issued between 2009 and 2011], which we believe is partly attributable toan increased availability of credit in subprime lending, among other factors,"S&P Ratings said. "As a result, more consumers with weak credithistories can obtain financing at franchised dealerships and no longer need toseek a vehicle/financing solution from DriveTime or others in the deep subprimearena. We believe the higher losses likely resulted from the return ofDriveTime's traditional customer base, which is more credit-challenged."

Pricingon the class A notes of AmeriCredit Auto Receivables Trust 2016-2 improvedslightly relative to the platform's two previous deals, which had beennoteworthy for their wide spreads.(DT Auto Owner Trust 2016-2 is not a publicly registered deal and pricinginformation is not available.)

Accordingto a free-writing prospectus, which presented the transaction at the upsizedamount of $1.20 billion, the $305.1 million tranche of class A-2A notes carry aspread of 70 basis points over the eurodollar synthetic forward rate for acoupon of 1.42%. The spread and coupon are 5 and 10 basis points, respectively,narrower than that of the comparable tranche of the platform's first2016-vintage transaction. The spread is comparable to that of the fourth andfinal AmeriCredit Auto Receivables Trust deal of 2015.

Theclass A-2B notes were priced to float at 70 basis points over 1-month LIBOR, 5basis points below the spreads for the comparable tranches of the platform'stwo previous transactions. The class A-3 notes have a spread of 75 basis pointsabove a benchmark rate, also representing improvement from the comparabletranches of the platform's two previous deals.

Whenviewed in comparison to the five AmeriCredit Auto Receivables Trust deals thatsold during a period of approximately one year ending in August 2015, however,the pricing dynamics of the platform's latest transaction remained unfavorable.The average spread over 1-month LIBOR on the class A-2B pieces of those fivedeals was 41 basis points, 29 basis points narrower than the same tranche ofAmeriCredit Auto Receivables Trust 2016-2. The class A-3 notes of the fiveearlier deals carried average spreads of approximately 46 basis points over thebenchmark rates used in the individual transactions, which is also 29 basispoints narrower than AmeriCredit Auto Receivables Trust 2016-2.

Whetherthe slightly improved pricing is a reflection of the composition of theparticular collateral pools, a reflection of some reduction in marketvolatility since January, modestly increased investor appetite for subprimeauto ABS paper or some combination thereof remains to be seen. Headline risk,given the steady stream of articles and commentary casting doubt upon the assetclass, does not seem likely to dissipate any time soon.