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Loss projections rise for buy-here, pay-here lender's subprime auto ABS deal

The upward trajectory of the rating agency cumulative net loss estimates associated with a buy-here, pay-here company's ABS platform offers another data point regarding the challenges confronting companies in an increasingly scrutinized business.

S&P Global Ratings and Kroll Bond Rating Agency on Dec. 9 issued preliminary ratings on Byrider Finance LLC's $109.8 million CarNow Auto Receivables Trust 2016-1, a transaction for which both expect base-case cumulative net losses to exceed 30%. Their projections are consistent with recently raised cumulative net loss expectations for certain outstanding Byrider securitizations, but they are well above the base-case estimates that had been originally assigned to those earlier-vintage transactions.

The 2016-1 pool includes receivables with an aggregate balance of $162.6 million. The weighted-average annual percentage rate is 20.83%, and the nonzero weighted-average borrower credit bureau score is 545. The total initial hard credit enhancement pertaining to the class A notes in the 2016-1 deal is 66% as compared with 55% for Byrider's CarNow Auto Receivables Trust 2015-1, reflecting a sharp increase in the amount of overcollateralization. Both rating agencies expect to rate the class A piece at AA(sf).

S&P Global Ratings' initial expected cumulative net loss range on the 2016-1 pool is between 33% and 34%. It initially ranged from 26.75% to 27.25% on the 2015-1 pool, but the rating agency subsequently revised it upward to between 33% and 34%, given that the collateral had been performing "significantly worse than expected."

Kroll Bond Rating Agency, meanwhile, issued a base-case cumulative net loss range of between 31.9% and 33.9% on the 2016-1 pool. It, too, had raised its projection for the 2015-1 pool to between 32.75% and 34.75% from between 24.74% and 26.75% as originally issued.

S&P Global Ratings reported that Byrider's 2012-1 pool took cumulative net losses of 18.66% relative to its base-case range of between 21.75% and 22.25%, but the 2013-1 pool took a cumulative net loss of 25.43% as compared with a base-case projection ranging from 21.75% to 22.25%. In raising its cumulative net loss expectation for the 2015-1 pool and the 2014-1 pool, S&P Global Ratings cited a "challenging competitive environment and weaker underwriting."

In reference to buy-here, pay-here lenders and other companies that specialize in deep subprime auto credits, S&P Global Ratings said, "this segment of the market has been especially vulnerable to the prolonged, highly competitive environment in which several large lenders had begun to buy deeper in the credit spectrum. This likely caused them to be adversely selected, resulting in a weaker borrower profile."

Kroll Bond Rating Agency said it had not seen "sufficient evidence that portfolio servicing and losses have stabilized" following the company's implementation of "significant" changes in its servicing operations. Those changes took place, the rating agency said, as Byrider acquired franchises and "attempted to find the right organizational structure for their customer segment."

On Byrider's $337.7 million managed portfolio as of Sept. 30, the annualized net charge-off rate was 20.13%, up from 17.64% on the same date in 2015. But its 31-plus-day delinquency rate improved 43 basis points year over year to 6.65% after that metric deteriorated during both 2014 and 2015.

Kroll Bond Rating Agency noted that Byrider majority owner Altamont Capital Management LLC contributed $7.5 million of capital in January to partially offset the net loss the company incurred in 2015.

Companies in and around the financial services industry have faced an increased frequency of questions in public forums regarding their views on subprime auto lending and servicing following a series of headlines that highlighted deteriorating loan performance in the asset class.

Capital One Financial Corp. Chairman, President and CEO Richard Fairbank said recently that his company's subprime auto loan originations "shrank pretty dramatically in the fourth quarter of last year" as it "flagged" some underwriting practices in the business that made it uncomfortable. But, he added: "No sooner had we finished that whole speech then we showed up with a lot of subprime growth this year because the particular player pulled back on some of that kind of stuff. So it's a little dizzying following our story here."

Ally Financial Inc. executives said recently that the company had reduced its overall exposure to subprime auto as it has chosen to remain "very disciplined."

Santander Consumer USA Holdings Inc. officials have also emphasized their company's disciplined approach to subprime originations. The company's retail auto originations in its core nonprime business fell 29% year over year in the third quarter.