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Banks press ahead with auto ABS issuances

Despite mixed reviews regarding the economics of auto ABS deals during the fourth quarter of 2016, several banks are plotting returns to the market.

Bank of Nova Scotia and a subsidiary of Mechanics Bank, the Walnut Creek, Calif.-based institution that acquired California Republic Bancorp on Oct. 1, 2016, both laid the groundwork for auto ABS deals in recent days.

Securitized Term Auto Receivables Trust 2017-1 would represent the bank's second cross-border auto ABS transaction to the extent it is structured similarly to a deal completed by the platform in October 2016. The first transaction, which was backed by a pool of fixed-rate Canadian dollar-denominated prime auto loan receivables, included $500 million of senior notes that were sold to third-party investors while Bank of Nova Scotia retained the two subordinated classes of notes which were valued at C$45.4 million, according to S&P Global Ratings.

A Feb. 3 S&P Global Ratings presale report indicates that the new deal is similar from structural and credit-enhancement perspectives, with $500 million of senior, U.S. dollar-denominated notes and C$45 million in subordinated notes.

California Republic had been a fairly regular issuer of auto ABS prior to its sale, conducting two such transactions during the first half of 2016. The most recent of the deals, the $400 million California Republic Auto Receivables Trust 2016-2, closed in June 2016. Mechanics Bank, which agreed to acquire California Republic in April 2016, told banking regulators it intended to retain the management and employees of the target's indirect auto division given their extensive experience in the industry.

California Republic Auto Receivables Trust 2017-1 is backed by a $421.1 million pool of new and used vehicle loans, according to a prospectus filed Feb. 3.

Rating agencies had identified auto ABS issuance by banks as one of the variables in their 2017 outlooks for the overall volume of activity in the market.

TCF Financial Corp. officials said recently that they planned to conduct whole-loan sales in lieu of securitizations in the first quarter after the company's results for the fourth quarter of 2016 included the impact of a significant decline in the relative profitability of the secondary market for auto loans. The market conditions were such that they led management to express concern about the effectiveness of TCF's originate-to-sell model in its auto finance business. Net gains on sales of auto loans dropped to $1.1 million in the fourth quarter of 2016 from $3.1 million in the year-earlier period.

The $503 million TCF Auto Receivables Owner Trust 2016-PT1 closed Dec. 14, 2016, nearly three months after a similarly sized TCF auto ABS deal settled.

Another sponsor observed challenges with a prime auto ABS deal that was in the market earlier in the same quarter and cast doubt upon future issuance.

Santander Consumer USA Holdings Inc. said it recorded a $23 million investment loss during the fourth quarter of 2016 as a result of losses related to an off-balance sheet securitization and certain other accounting adjustments.

Executives explained during a Jan. 25 conference call that the losses were primarily related to the company's Chrysler Capital Auto Receivable Trust platform. The $841 million Chrysler Capital Auto Receivables Trust 2016-B closed Nov. 4.

CFO Ismail Dawood said investor appetite for the platform's bonds had "kind of waned" since late 2014 and early 2015 when it had been able to sell residual interests at a gain. The company hoped to enter a flow agreement with majority owner Banco Santander SA that would effectively serve as a substitute for future issuance on that platform. The company's more established deep-subprime auto ABS platform has already completed a transaction this year the $1.17 billion Drive Auto Receivables Trust 2017 that closed Jan. 31.

Another regular issuer of auto ABS, Ally Financial Inc., said it plans to increase its reliance on bank deposits as part of its funding mix relative to secured debt. CFO Christopher Halmy during a Jan. 31 call said analysts and investors would "continue to see us active in the securitization markets" as the company intends to "dramatically" reduce the size of certain large, LIBOR-based liquidity facilities.

Huntington Bancshares Inc. said it recorded a $5.6 million gain on its $1.5 billion Huntington Auto Trust 2016-1, which closed Nov. 30, 2016. Company executives said in December 2016 that they expected to conduct auto loan securitizations in 2017.