CarMax Auto Owner Trust

Transcription

1 Presale: CarMax Auto Owner Trust Primary Credit Analyst: Ines A Beato, New York (1) ; ines.beato@spglobal.com Secondary Contact: Peter W Chang, CFA, New York (1) ; peter.chang@spglobal.com Table Of Contents $1.00 Billion Auto Receivables Asset-Backed Notes Rationale Changes From The Series Transaction Transaction Structure Transaction Summary Payment Structure Pool Analysis Securitization Performance Surveillance Update Managed Portfolio S&P Global Ratings' Expected Loss: 2.15%-2.25% Cash Flow Modeling Assumptions And Results Modeling The Class A-2-B Floating-Rate Notes JULY 7,

2 Table Of Contents (cont.) Sensitivity Analysis Money Market Tranche Sizing Legal Final Maturity CarMax Related Criteria And Research JULY 7,

3 Presale: CarMax Auto Owner Trust $1.00 Billion Auto Receivables Asset-Backed Notes This presale report is based on information as of July 7, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings As Of July 7, 2016 Class Preliminary rating(i) Type Interest rate Preliminary amount (mil. $) Upsized preliminary amount (mil. $)(iii) Expected legal final maturity date A-1 A-1+ (sf) Senior Fixed Aug. 15, 2017 A-2(ii) AAA (sf) Senior Fixed/floating Aug A-3 AAA (sf) Senior Fixed May 17, 2021 A-4 AAA (sf) Senior Fixed Jan. 18, 2022 B AA (sf) Subordinate Fixed April 15, 2022 C A (sf) Subordinate Fixed June 15, 2022 D BBB (sf) Subordinate Fixed Jan. 17, 2023 (i)the rating on each class of securities is preliminary and subject to change at any time. (ii)the class A-2 notes will be split into a fixed-rate class A-2A and a floating-rate class A-2B. The sizes of classes A-2A and A-2B will be determined at pricing, and the size of class A-2B will not exceed 50% of the class A-2A total size. The class A-2B coupon will be expressed as a spread tied to one-month LIBOR. (iii)the anticipated bond sizes if the aggregate initial principal balance of the notes is $1.25 billion. Profile Expected closing date July 20, Collateral Originator, servicer, and sponsor Depositor and seller Indenture trustee Underwriters Owner trustee Prime auto loan receivables. CarMax Business Services LLC. CarMax Auto Funding LLC. Wells Fargo Bank N.A. Credit Suisse Securities (USA) LLC. U.S. Bank Trust N.A. Credit Enhancement Summary (%) Class A Series Series (upsized) Series Series Initial(i) Target(i) Floor(i) Initial(i) Target(i) Floor(i) Initial(i) Target(i) Floor(i) Initial(i) Target(i) Floor(i) Subordination Reserve account O/C Total JULY 7,

4 Credit Enhancement Summary (%) (cont.) Series Series (upsized) Series Series Initial(i) Target(i) Floor(i) Initial(i) Target(i) Floor(i) Initial(i) Target(i) Floor(i) Initial(i) Target(i) Floor(i) Class B (rated 'AA (sf)' for series and and rated 'AA+ (sf)' for series ) Subordination Reserve account O/C Total Class C (rated 'A (sf)' for series and and rated 'A+ (sf)' for series ) Subordination Reserve account O/C Total Class D Reserve account O/C Total Estimated annual excess spread(ii) (i)percentage of the initial receivables balance. (ii)includes the 1.00% servicing fee. O/C--Overcollateralization. Rationale The preliminary ratings assigned to CarMax Auto Owner Trust 's auto receivables asset-backed notes reflect: The availability of approximately 12.46%%, 9.89%, 7.62%, and 5.56% (12.48%%, 9.92%, 7.64%, and 5.58% if upsized) credit support for the class A, B, C, and D notes, respectively, based on our stressed break-even cash flow scenarios. These credit support levels provide more than 5.0x, 4.0x, 3.0x, and 2.0x our 2.15%-2.25% expected net loss range to the class A, B, C, and D notes, respectively (see the Expected Loss section of this report for more information). That under a moderate ('BBB') stress scenario, the ratings on the class A and B notes will remain within one rating category of the preliminary ratings during the first year, and the ratings on the class C and D notes will remain within two rating categories, which is consistent with our credit stability criteria (see "Methodology: Credit Stability Criteria," published May 3, 2010). The transaction's ability to make timely interest and principal payments under stressed cash flow modeling scenarios appropriate for the assigned preliminary ratings. The performance of CarMax Business Services LLC's (CarMax's) previous securitizations since The collateral characteristics of the securitized pool of auto loans, including a weighted average FICO score of 703. The transaction's payment and legal structures. JULY 7,

5 Changes From The Series Transaction The series transaction's structural and enhancement changes from series include the following: The class A notes' subordination decreased to 6.35% from 6.65%. The class B notes' subordination decreased to 3.55% from 4.25%. In our view, the pool's credit quality is slightly weaker compared with that of the series pool. Changes in the collateral composition from the series transaction include the following: The weighted average FICO score decreased slightly to 703 from 704. The percentage of the pool with a FICO greater than 700 decreased to 46.67% (46.58% if upsized) from 48.19%. The percentage of the pool in the company's highest credit grade, tier A, decreased to 49.45% (49.36% if upsized) from 50.71%. The weighted average seasoning decreased to 2.3 months from 4.9 months. Our loss expectation range for series is 2.15%-2.25%, up from 2.10%-2.20% for , reflecting a slight deterioration in the collateral pool. Despite our higher expected net loss range on this transaction, credit enhancements did decrease as compared to the transaction; however, the lower credit enhancement is still commensurate with the assigned ratings. CarMax provided approximately 5.6x and 4.7x coverage (based on stressed break-even cash flow scenarios giving full credit to excess spread) of the upper end of its 2.10%-2.20% range at the 'AAA' and 'AA' ratings, respectively; CarMax provides approximately 5.5x and 4.4x (5.5x and 4.4x if upsized) coverage of the upper end of its 2.15%-2.25% range. Transaction Structure CarMax will sell a pool of auto loan receivables to CarMax Auto Funding LLC, which will then sell the receivables to CarMax Auto Owner Trust , the transaction's issuing trust (see chart 1). In rating this transaction, we will review the legal matters that we believe are relevant to our analysis as outlined in our criteria. JULY 7,

6 Transaction Summary The series transaction incorporates the following structural features: A sequential-pay mechanism among the class A, B, C, and D notes that is expected to result in more credit enhancement, as a percentage of the current pool balance, for the higher classes as the pool amortizes. The subordination of approximately 6.35%, 3.55%, and 1.55% for the class A, B, and C notes, respectively. A nonamortizing reserve account that will equal 0.25% of the initial pool balance. The use of excess spread, to the extent available after covering net losses, to pay principal on the outstanding notes to create and build O/C to a target and floor of 0.50% of the initial pool balance. Payment Structure The trust will pay scheduled interest and principal on the rated notes on each monthly distribution date, beginning JULY 7,

7 Aug. 15, The payment priority that CarMax presented to S&P Global Ratings indicated that the trust will use the auto loan collections to make the distributions shown in table 1. In addition, the funds in the reserve account are intended to be available to pay interest shortfalls and make priority principal payments. Table 1 Payment Waterfall Priority Payment 1 Servicer fee (1.00% per year). 2 Pro rata: (a) The successor servicer fees (if the servicer has been replaced) and transition expenses capped at $175,000, and (b) any asset representations reviewer fees and expenses capped at $175, Class A note interest (pro rata among the classes). 4 The first-priority principal distributable amount to the class A noteholders, sequentially, to maintain the class A notes' parity with the receivables. 5 Class B note interest. 6 The second-priority principal distributable amount, sequentially, to maintain the class A and B notes' parity with the receivables. 7 Class C note interest. 8 The third-priority principal distributable amount, sequentially, to maintain the class A, B, and C notes' parity with the receivables. 9 Class D note interest. 10 The fourth-priority principal distributable amount, sequentially, to maintain the class A, B, C, and D notes' parity with the receivables. 11 To the reserve account until the required amount is met. 12 The regular principal distributable amount, sequentially, to the class A-1, A-2, A-3, A-4, B, C, and D notes until each class is paid in full (this will also build overcollateralization to the target amount). 13 Pro rata: (a) Unpaid transition expenses in excess of the cap amounts listed in item 2 that are due in the event of a servicer termination, any additional servicing fees that are to be paid to the successor servicer, and any unpaid fees, and (b) expenses due to the asset representations reviewer that are in excess of the related cap amounts listed in item Any unpaid indemnity amounts to the successor servicer exceeding the cap amounts listed in item Any remainder to the certificateholders. Pool Analysis As of the June 30, 2016, cut-off date, the series pool consists of 54,072 loans (67,616 if upsized) totaling $1.00 billion ($1.25 billion if upsized) in motor vehicle loans originated by CarMax's affiliates (see table 2). In our view, the series pool's credit characteristics are generally in line with recent pools from this issuer over the past two years. Table 2 Collateral Comparison(i) Series Receivables balance (bil. $) No. of receivables (upsized pool) (ii) (ii) ,072 67,616 73,246 67,212 63,453 53,426 71,701 60,150 62,914 60,176 JULY 7,

8 Table 2 Collateral Comparison(i) (cont.) Series Avg. loan balance ($) Weighted avg. APR (%) Weighted avg. original term (mos.) Weighted avg. remaining term (mos.) Weighted avg. seasoning (mos.) Weighted avg. FICO score Original term months. (%) New vehicles (%) Used vehicles (%) (upsized pool) (ii) (ii) ,494 18,487 16,042 16,961 16,548 18,717 16,248 16,625 18,517 16, Top five state concentrations (%) CA=17.57 CA=17.59 CA=18.09 CA=16.75 CA=16.33 CA=17.29 CA=18.52 CA=17.10 CA=17.56 CA=17.42 TX=11.90 TX=11.89 TX=12.04 TX=11.94 TX=12.33 TX=12.61 TX=12.17 TX=12.89 TX=13.23 TX=12.09 FL=10.34 FL=10.31 FL=11.12 FL=10.37 FL=9.83 FL=10.09 FL=11.21 FL=10.23 FL=9.39 FL=9.73 GA=6.34 GA=6.39 IL=6.47 IL=5.93 GA=6.44 GA=6.44 GA=6.09 GA=6.39 GA=6.52 GA=7.90 NC=5.64 NC=5.62 GA=5.59 GA=5.87 IL=5.95 VA=5.66 NC=5.77 IL=6.00 IL=6.20 IL=6.21 (i)all percentages are of the initial receivables balance. (ii)s&p Global Ratings did not rate the series and transactions; the issuer provided data for these transactions. APR--Annual percentage rate. CNL--Cumulative net loss. NR--Not rated. Securitization Performance CarMax's series through pools experienced approximately 2.7%-3.9% in cumulative net losses (CNLs). These older pools had lower weighted average FICO scores ( ) and weaker distributions across the issuer's credit grades. Furthermore, they were originated during a weak economy, which included a sharp rise in the national unemployment rate. The series through pools, which had stronger credit grade distributions and better collateral characteristics, exhibited stronger performance, with these paid-off pools experiencing losses of approximately 1.3%-1.9%. Our loss expectations on the more recent series through pools range from 1.85%-2.25%. In our view, JULY 7,

9 CarMax's general underwriting characteristics and the stable economic conditions should keep losses within this expected range in the near term (see charts 2 and 3). Chart 2 JULY 7,

10 Chart 3 Surveillance Update We maintain ratings on 11 active CarMax Auto Owner Trust transactions that closed between 2012 and 2016 (see table 3). We performed a full review of the transactions in August 2015 (see "Various Rating Actions Taken On Nine CarMax Auto Owner Trusts Following Review," published Aug. 13, 2015). We reviewed our expected lifetime loss in April and revised our expected CNL accordingly. All transactions continue to perform in line or better than our initial expectation (see table 3). Each of the outstanding transactions remains adequately enhanced at this time. We will continue to monitor their performance to determine if the ratings we assigned are sufficient and if we believe any rating actions are appropriate. Table 3 Performance Data For Outstanding CarMax Auto Owner Trust As Of The June 2016 Distribution Date Series Month Pool factor (%) CNL (%) 60-plus-day delinquencies (%) Initial lifetime CNL exp. (%)(i) Revised lifetime CNL exp. (%)(ii) JULY 7,

11 Table 3 Performance Data For Outstanding CarMax Auto Owner Trust As Of The June 2016 Distribution Date (cont.) Series Month Pool factor (%) CNL (%) 60-plus-day delinquencies (%) Initial lifetime CNL exp. (%)(i) Revised lifetime CNL exp. (%)(ii) N/A N/A N/A N/A (i)represents the expected lifetime loss for the transactions and represents the August 2015 update for series (ii)represents the April 2016 update. CNL exp.--cumulative net loss expectations. N/A--Not applicable. Managed Portfolio As of May 31, 2016, CarMax's serviced portfolio under its primary underwriting program totaled approximately $9.8 billion, an increase of approximately 11.5% since May 31, Delinquencies improved to 2.66% from 3.17% as of year-end 2015, but are up slightly from 2.52% for the same period in Net losses on a full-year basis remained stable at 0.82% for the past three years. Annualized net losses follow the same trend as delinquencies--they are lower than year-end 2015, but slightly higher compared with May 2015 (see table 4). Table 4 Managed Portfolio Performance As of May 31 Year ended Dec Portfolio at end of period (bil. $) No. of contracts 727, , , , , , , , , ,126 Delinquencies (%) days days days or more Total delinquencies (% of the portfolio) Avg. month-end amount outstanding during the period (bil. $) Net charge-offs for period (mil. $) Annualized net charge-offs (% of avg. month-end amount outstanding) JULY 7,

12 S&P Global Ratings' Expected Loss: 2.15%-2.25% To derive the base-case loss assumptions for the series transaction, we examined CarMax's static pool performance data from 2006 to 2015, stratified by CarMax's proprietary credit grades. The proprietary credit grade incorporates the loan structure (term and advance rate) and demographic data (income, debt-to-income ratios, and payment-to-income ratios). We used the paid-off loss curves to project losses for the outstanding collateral. We also considered net losses on the paid-off collateral, along with the projections on the 2012-second-quarter 2015 outstanding collateral, to arrive at loss proxies for each credit grade and applied the pool composition weights by credit grade to determine a weighted average loss projection for the series pool. There are no loans in the pool from CarMax's subprime lending pilot program launched in January Based on our review of the static pool performance by credit grade, the recent securitization performance, the managed portfolio performance, and a forward-looking view of the economy, we expect CarMax Auto Owner Trust to experience CNLs in the 2.15%-2.25% range. Cash Flow Modeling Assumptions And Results We modeled the transaction to simulate stress scenarios commensurate with the preliminary 'AAA (sf)', 'AA (sf)', 'A (sf)', and 'BBB (sf)' ratings (see table 5). Table 5 Cash Flow Assumptions And Results Class A B C D Preliminary rating AAA (sf) AA (sf) A (sf) BBB (sf) Net loss timing (mos.) 12/24/36/48 12/24/36/48 12/24/36/48 12/24/36/48 Net loss (%) 25/30/35/10 25/30/35/10 25/30/35/10 25/30/35/10 ABS voluntary prepayments (%) Recovery rate (%) Recovery lag (mos.) Approximate break-even levels (%)(i) (12.48 if upsized) 9.89 (9.92 if upsized) 7.62 (7.64 if upsized) 5.56 (5.58 if upsized) (i)the maximum cumulative net losses on the pool that the transaction can withstand without triggering a payment default on the relevant classes of notes. ABS--Absolute prepayment speed. Based on the cash flow stress results, each class in the series transaction is, in our view, enhanced to the degree necessary to withstand a stressed level of net losses consistent with the assigned preliminary ratings. Modeling The Class A-2-B Floating-Rate Notes Class A-2 is split into two classes: class A-2-A (fixed rate) and A-2-B (floating rate). For modeling purposes, we assume JULY 7,

13 class A-2-B to be 50% of the combined class A-2. This introduces interest-rate risk into the transaction because the assets are fixed-rate contracts and the class A-2-B notes are floating-rate and do not have an interest-rate hedge. We modeled the coupon on the floating-rate notes using the appropriate high-path interest rate vector to simulate a stressed floating-rate scenario (see "U.S. Interest Rate Assumptions Revised For May 2012 And Thereafter," published April 30, 2012). Sensitivity Analysis Besides analyzing break-even cash flows, we conducted a sensitivity analysis to see whether under a moderate ('BBB') stress scenario, all else being equal, our ratings on the class A and B notes would remain within one rating category of the assigned preliminary ratings for the first year and our ratings on the class C and D notes would remain within two rating categories (see table 6). Table 6 Scenario Analysis Summary CNL level (%) 4.30 Loss timing (month 12/24/36/48) (%) Voluntary ABS (%) 1.50 Servicing fee (%) 1.00 Recovery rate (%) Coverage of remaining losses Class A Class B Class C Class D 30/30/30/10 Initially 3.21x, then dips, but increases to 3.57x by month 12 and increases thereafter (initially 3.22x, then dips, but increases to 3.58x by month 12 and increases thereafter). Initially 2.58x, then dips, but increases past 2.66x by month 12 and increases thereafter (initially 2.58x, then dips, but increases past 2.67x by month 12 and increases thereafter). Initially 2.12, then dips through month five, but reaches 2.01x by month 12 and then increases thereafter (initially 2.13, then dips through month six, but reaches 2.02x by month 12 and then increases thereafter). Initially 1.77x, then dips gradually, reaching a low of 1.39x in month 23, and then increases thereafter (initially 1.78x, then dips gradually, reaching a low of 1.39x in month 22, and then increases thereafter). CNL--Cumulative net loss. ABS--Absolute prepayment speed. The results of our sensitivity analysis indicated that the ratings on the class A and B notes will remain within one rating category of the assigned preliminary ratings in a moderate stress scenario over the first year and that the ratings on the class C and D notes will remain within two rating categories. This is within the outer bounds of our credit stability criteria, which state that the maximum deterioration associated with 'AAA' and 'AA' category ratings within the first year of issuance is a one-category reduction and the maximum deterioration associated with 'A' and 'BBB' category ratings within the first year of issuance is a two-category reduction (see charts 4A and 4B for the coverage multiples over the first three years for the class A through D notes under a moderate 'BBB' stress scenario). JULY 7,

14 Chart 4A JULY 7,

15 Chart 4B Money Market Tranche Sizing The proposed money market tranche's (class A-1) legal final maturity date is Aug. 15, To test whether the money market tranche can be repaid by its maturity date, we ran cash flows using assumptions to delay the principal collections. We assumed zero defaults and a 0.50% absolute prepayment speed for our cash flow run, and we checked that approximately 10 months of principal collections would be sufficient to pay off the money market tranche. Legal Final Maturity To test the legal final maturity dates set for the long-dated tranches (classes A-2 through C), we determined the date when the respective notes were fully amortized in a zero-loss and zero-prepayment scenario and then added three months to the result. For the longest-dated security (class D), we added six months to the remaining term of the longest receivable in the pool to accommodate extensions on the receivables. Furthermore, in the break-even scenario for each rating level, we confirmed that credit enhancement was sufficient to cover losses and to repay the related notes in full by the legal final maturity date. JULY 7,

16 CarMax CarMax has employed the used-car store concept since 1993 and is the largest retailer of used cars in the U.S. with 160 used car stores in 80 markets as of May 31, CarMax purchases, reconditions, and sells primarily used vehicles, as well as some new vehicles, under various franchise agreements. CarMax also offers a range of related products and services, including financing, extended service contracts, accessories, and repair service. Related Criteria And Research Related Criteria Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, May 29, 2015 Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015 Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 U.S. Interest Rate Assumptions Revised For May 2012 And Thereafter, April 30, 2012 General Methodology And Assumptions For Rating U.S. Auto Loan Securitizations, Jan. 11, 2011 Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009 Legal Criteria For U.S. Structured Finance Transactions: Securitizations By Code Transferors, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Select Issues Criteria, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Appendix III: Revised UCC Article 9 Criteria, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Criteria Related To Asset-Backed Securities, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006 Related Research Various Rating Actions Taken On Nine CarMax Auto Owner Trusts Following Review, Aug. 13, 2015 Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, The author would like to thank Linda Yeh for her analytical contributions to this presale report. JULY 7,

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