Honda Auto Receivables Owner Trust

Transcription

1 Presale: Honda Auto Receivables Owner Trust This presale report is based on information as of Oct. 13, 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 Oct. 13, 2016 Class Preliminary rating(i) Type Interest rate Preliminary amount (mil. $) Upsized preliminary amount (mil. $)(ii) Legal final maturity date A-1(iii) NR Senior Fixed Oct. 18, 2017 A-2 AAA (sf) Senior Fixed April 18, 2019 A-3 AAA (sf) Senior Fixed Dec. 18, 2020 A-4 AAA (sf) Senior Fixed Jan. 18, 2023 Certificates NR Subordinate N/A Jan. 18, 2023 (i)the rating on each class of securities is preliminary and subject to change at any time. (ii)the anticipated bond sizes if the aggregate initial principal balance of the notes is $1.5 billion. (iii)the class A-1 notes will be retained by American Honda Receivables LLC at closing. NR--Not rated. N/A--Not applicable. Profile Expected closing date Oct. 25, Collateral Prime auto loan receivables. Originator, sponsor, servicer, and administrator American Honda Finance Corp. (A+/Stable/A-1). Depositor American Honda Receivables LLC. Primary Credit Analyst: Jie Liang, CFA, New York (1) ; jie.liang@spglobal.com Secondary Contact: Timothy J Moran, CFA, FRM, New York (1) ; timothy.moran@spglobal.com See complete contact list on last page(s) OCTOBER 13,

2 Profile (cont.) Issuer Lead underwriter Indenture trustee Owner trustee Honda Auto Receivables Owner Trust. Barclays Capital Inc. (A-/Negative/A-2). Citibank N.A. (A/Watch Pos/A-1). The Bank of New York Mellon (AA-/Stable/A-1+). Credit Enhancement Summary (%) HAROT HAROT (upsized) HAROT HAROT (iii) Class A Initial(i) Floor(i) Initial(i) Floor (i) Initial(i) Floor(i) Initial(i) Floor(i) Subordination Reserve account Total Estimated annual excess spread (with YSA)(ii) (i)percentage of the initial receivables balance. (ii)includes the 1% servicing fee. (iii)s&p Global Ratings did not rate this transaction. HAROT--Honda Auto Receivables Owner Trust. YSA--Yield supplement account. Rationale The preliminary ratings assigned to Honda Auto Receivables Owner Trust's (HAROT 's) $950 million ($1.14 billion if upsized) asset-backed notes series reflect: The availability of approximately 6.0% credit support for the class A-1 (not rated), A-2, A-3, and A-4 notes (collectively, the class A notes) based on our stressed cash flow scenarios. This credit support level provides approximately 10.0x coverage of our high-end expected net loss range of 0.50%-0.60% to the class A notes (see the Cash Flow Modeling Assumptions And Results section for details). The timely interest and principal payments made under stressed cash flow modeling scenarios that are appropriate for each preliminary rating category. The loss projections based on our review of American Honda Finance Corp.'s (Honda's) previous securitization performance, origination static pool data, and managed portfolio data; Honda's deal-level collateral characteristics compared with its prime auto finance company peers; and our forward-looking view of the economy. Our expectation that under a moderate ('BBB') stress scenario, all else being equal, our ratings on the notes will not decline by more than one rating category from the assigned preliminary ratings over a 12-month period. Our ratings stability criteria describe the outer bound of credit deterioration within one year as being one rating category for 'AAA' rated securities (see "Methodology: Credit Stability Criteria," published May 3, 2010). The credit enhancement in the form of an unrated subordinate certificate, a reserve fund, a yield supplement account (YSA), and excess spread (see the Credit Enhancement Summary table above). The pool of prime auto loans, which has a weighted average FICO score of 765 (764 if upsized) and weighted average seasoning of approximately 13.6 (13.5 if upsized) months. Honda's extensive securitization history and the performance of its transactions, which, in our view, have exhibited consistently low loss levels. The transaction's payment and legal structures. OCTOBER 13,

3 Transaction Overview HAROT is Honda's fourth auto loan securitization in 2016, issuing under its Regulation AB II compliant retail shelf. The notes will be supported by a zero coupon, nonamortizing subordinate certificate equal to 2.50% of the initial collateral balance, a nonamortizing reserve account equal to 0.25% of the initial collateral balance, a YSA, and excess spread. The pool's unadjusted weighted average annual percentage rate (APR) is 2.10% (2.09% if upsized). HAROT will utilize the cash YSA funded by the note proceeds, which will increase the yield on the pool to 4.70% to generate additional excess spread to support the transaction. Interest and principal on the notes are scheduled to be paid on the 18th of each month, or if such date is not a business day, then on the next business day, starting on Nov. 18, We expect the notes to have a fixed interest rate, and principal on the notes will be paid sequentially. In rating this transaction, S&P Global Ratings will review the relevant legal matters outlined in our criteria. Changes From The Series Transaction The collateral composition, structural, and credit enhancement changes from the series transaction, include (figures in parentheses refer to the upsized pool if the two pools differ): The required rate for the collateral pool increased to 4.55% from 4.40%. The weighted average FICO increased to 765(764) from 763. The percentage of Honda-branded vehicles increased to 94.14% (94.17%) from 86.66%, while the Acura-branded vehicles decreased to 5.86% (5.83%) from 13.34%. The average current balance decreased to $16,483 ($16,495) from $17,804. The weighted average original term increased to (60.24) months from months. The weighted average seasoning increased to (13.53) months from months. The percentage of subvened loans (loans with an APR that is 4.0% or less) increased to 90.55% (90.53%) from 88.14%. Overall, the series collateral pool's credit quality is similar to series , in our opinion. Our expected loss range for the series pool is 0.50%-0.60%, unchanged from the series Transaction Structure The HAROT transaction incorporates the following structural features: A sequential-pay mechanism that will increase credit enhancement for the senior notes as the pool amortizes. An unrated money market tranche that will receive principal payments senior in the waterfall. A zero coupon subordinate certificate, which will not receive principal payments until the class A notes have fully paid down. A nonamortizing reserve fund that will equal 0.25% of the initial collateral balance. A YSA intended to increase the yield generated from the loans, which would increase the excess spread available to OCTOBER 13,

4 make payments, if necessary, on the notes. Chart 1 shows the transaction structure. The YSA On the closing date, the seller will fund the YSA with an initial $65.10 million ($78.12 million if upsized) deposit, which is approximately 5.08% of the initial pool balance. The YSA is designed primarily to supplement the interest collections on the receivables that have APRs that are less than the required rate (4.55%), referred to as discount receivables. On each payment date, funds are withdrawn from the YSA in an amount necessary to increase the interest rate on the discount receivables to the required rate. These funds are deposited into the collection account monthly to make distributions to the noteholders. On each payment date, the YSA will decline to the present value of the sum of all yield supplement amounts for future payment dates, assuming loan payments are made as scheduled. Any excess funds in the YSA will be released to the collection account and will be available, if necessary, to cover net losses. OCTOBER 13,

5 Payment Structure Distributions will be made from available funds according to the priority shown in table 1. Table 1 Payment Waterfall Priority Payment 1 Servicing fee of 1%, including any unpaid servicing fees and nonrecoverable advances. 2 Indenture trustee, owner trustee, and asset representations reviewer fees, capped at $250,000 per year. 3 Class A note interest, paid pro rata to the class A noteholders. 4 Class A note principal, paid sequentially. 5 Certificate interest, if applicable(i). 6 Certificate principal (this amount will remain at zero until the class A notes are paid in full). 7 Replenish the reserve fund to the specified reserve fund balance. 8 Any unpaid indenture trustee, owner trustee, and asset representations reviewer fees. 9 Any remainder to the depositor. (i)the certificate interest is 0.00%. Securitization Performance In our view, Honda's securitizations have historically performed well with consistently low losses. Honda's paid-off securitizations from (ending with series ) experienced cumulative net losses (CNLs) ranging from 0.24%-1.24% (see chart 2), and only four of the 58 transactions Honda has issued since 2000 have experienced CNLs greater than 0.80%. Those transactions were issued in 2002 and from ; the series transaction had the highest loss level at 1.24%. We believe the higher losses on those deals came from a combination of a weak economy, lower FICO scores, a higher percentage of used vehicles, and less seasoning. OCTOBER 13,

6 Chart 2 The more recent securitizations have a higher weighted average FICO score (generally in the range), fewer used vehicles, and more seasoning. We believe pools with higher seasoning levels, all else being equal, will have lower loss rates. Honda's outstanding securitizations from series through are performing with low loss levels (see chart 3). Although we did not rate all of Honda's issuances, the company provided us with performance data on each transaction. Based on current performance, we believe Honda's outstanding 2013 pools will lose 0.35% or less. In addition, we believe that the outstanding 2014 pools and the pool will lose 0.40% or less. In our view, Honda's transactions benefit from historically consistent underwriting policies and guidelines, strong collection and servicing practices, favorable recovery values, and high seasoning levels at deal inception. OCTOBER 13,

7 Chart 3 Managed Portfolio As of June 30, 2016, Honda's serviced portfolio consisted of contracts totaling $25.7 billion (see table 2), down approximately 7.5% from a year earlier. Per Honda's management, there has been a shift of managed portfolio for the past few years from retail to lease due to incentive spending. For the fiscal year ended March 31, 2016, annualized net losses as a percentage of the average principal were 0.28%, only six basis points higher than those of a year earlier at 0.22%, despite the shrinking portfolio balance. Also, total delinquencies (including repossessions) remained relatively low at 1.08% compared with 0.75% a year earlier. Table 2 Managed Portfolio(i) Three months ended June 30 Year ended March Period-end loan balance outstanding (bil. $)(ii) Avg. loan balance outstanding (bil. $) Repossessions (mil. $)(iii) OCTOBER 13,

8 Table 2 Managed Portfolio(i) (cont.) Three months ended June 30 Year ended March 31 Repossessions as a % of period-end loan balance outstanding Total delinquencies and repossessions as a % of the period-end loan balance outstanding Recoveries (mil. $) Net loss (mil. $) Net loss as a % of the avg. amount outstanding(iv) (i)includes contracts that Honda has sold but is still servicing. (ii)the remaining principal balance and unearned finance charges for all outstanding contracts. (iii)outstanding principal amount of contracts for which the related vehicle has been repossessed but hasn't been liquidated. (iv)annualized. Collateral Pool Analysis On the closing date, we expect the series trust to consist of approximately $1.28 billion ($1.54 billion if upsized) in motor vehicle loans. We compared the HAROT collateral pool with that of Honda's previous securitization pools and two recent transactions from Honda's peers in the prime auto loan sector: Toyota Auto Receivables 2016-C Owner Trust and Ally Auto Receivables Trust (see table 3). We view the credit characteristics as comparable with other super prime pools (those with weighted average FICO scores generally greater than 740) and similar to the pool characteristics found in Honda's securitizations. The series pool features a weighted average FICO score of 765 (764 if upsized) and a high concentration of credit grade-a loans, in addition to a weighted average seasoning of over 13 months. Table 3 Collateral Comparison(i) HAROT Receivables balance (bil. $) No. of receivables Avg. loan balance ($) Weighted avg. APR excluding the YSA (%) Weighted avg. original term (mos.) (Upsized) (ii) (ii) Ally (iii) Toyota 2016-C ,782 93,270 86,410 89,194 57,830 66,953 65,177 72,556 79,847 16,483 16,495 17,804 17,248 17,736 18,260 17,927 14,256 16, OCTOBER 13,

9 Table 3 Collateral Comparison(i) (cont.) HAROT Weighted avg. remaining term (mos.) Weighted avg. seasoning (mos.) Weighted avg. FICO score Original term mos. (%) Original term greater than 72 mos. (%) % of new vehicles % of used vehicles % of Honda vehicles % of Acura vehicles (Upsized) (ii) (ii) Ally (iii) Toyota 2016-C N/A N/A N/A N/A Top five state concentrations (%)(iv) Credit grade composition (%) CA=18.36 CA=18.39 CA=18.71 CA=18.85 CA=18.62 CA=17.95 CA=17.46 TX=11.96 CA=24.81 TX=9.87 TX=9.82 TX=9.09 TX=8.99 TX=9.30 TX=9.27 TX=9.30 CA=8.86 TX=16.33 IL=5.65 IL=5.65 IL=5.62 IL=5.40 IL=5.44 IL=5.71 IL=5.71 FL=8.32 IL=4.50 FL=5.04 FL=5.10 FL=4.98 FL=5.04 FL=5.28 FL=4.86 FL=5.08 PA=5.78 PA=3.88 VA=4.34 VA=4.35 NY=4.41 NY=4.68 VA=4.37 VA=4.43 VA=4.54 IL=5.21 NY=3.70 A N/A N/A B N/A N/A C N/A N/A D N/A N/A Initial lifetime CNL projection (%)(v) N/A N/A (i)all percentages are of the initial receivables balance. (ii)not rated by S&P Global Ratings. (iii)maximum loan term of 75 months. (iv)as a percentage of the principal balance. (v)see table 4 for initial and revised lifetime CNL projections for series and earlier transactions. HAROT--Honda Auto Receivables Owner Trust. Ally Ally Auto Receivables Trust Toyota 2016-C--Toyota Auto Receivables 2016-C Owner Trust. APR--Annual percentage rate. N/A--Not applicable. CNL--Cumulative net loss. HAROT Performance: Surveillance Update We maintain current ratings on nine active Honda Auto Receivables Owner Trust transactions that closed in (see table 4). We lowered our lifetime expected CNLs for series to in August Series OCTOBER 13,

10 and subsequent transactions have less than 18 months of performance to date and we are maintaining our initial expected CNLs. Each transaction remains adequately enhanced at this time. We will continue to monitor their performance and take any rating actions that we deem appropriate. Table 4 Performance Data For Outstanding S&P Global Ratings-Rated HAROT Transactions(i) Transaction/series Month Pool factor (%) CNL (%) 60+ day delinquency (%) Initial lifetime CNL projection (%) Revised lifetime CNL projection (%)(ii) Less than N/A N/A N/A N/A (i)as of the September 2016 distribution. (ii)revised in August HAROT--Honda Auto Receivables Owner Trust. CNL--Cumulative net loss. N/A--Not applicable. S&P Global Ratings' Expected Loss: 0.50%-0.60% To derive the base-case loss for the transaction, we analyzed Honda's paid-off securitized pools' cumulative loss performance from , and the more recent loss performance of the outstanding securitizations from We used the data from the paid-off pools to create loss-timing curves to project the outstanding transactions' net losses. We also looked at the cumulative recovery rates and delinquencies by vintage and considered our current and forward-looking view of the economy and auto loan sector. This takes into account our expectation of lower recovery rates going forward. In addition, we looked at other peer issuers' securitizations performance. In our analysis, we focused on Honda's extensive securitization history, as demonstrated by the performance of its transactions, which have generally exhibited low losses. In our view, Honda has demonstrated consistent credit policies. Its ability to manage losses, delinquencies, and recoveries is apparent from its strong portfolio and securitization performance statistics even through multiple economic downturns. Given Honda's low-loss performance track record, the current pool's strength, and our forward view of the economy (including lower expected recovery rates), we expect the series pool to experience CNLs of 0.50%-0.60%. Cash Flow Modeling Assumptions And Results Cash flow modeling tests the availability and timing of excess spread, which can be affected by many factors, such as the absolute level and timing of defaults, prepayment speeds, payment timing lags, and the collateral term. We modeled the series transaction to simulate 'AAA' rating stress scenarios under front- and back-loaded loss OCTOBER 13,

11 curves (see table 5). In our model, we used a bifurcated-pool method in which the subvened loans (for cash flow purposes, subvened means loans with APRs of 4% or less) prepay at much slower rates than nonsubvened loans, and the subvened loans' loss contribution to the pool's total aggregate losses is less than the subvened loans' proportional representation in the pool. Performance data indicate that lower-apr loans tend to prepay and default less frequently than higher-apr loans. Table 5 Cash Flow Assumptions/Results Front-loaded scenario Class A A Preliminary rating AAA (sf) AAA (sf) Back-loaded scenario Cumulative net loss timing (mos.) 12/24/36/48 12/24/36/48 Cumulative net loss timing aggregate (%) 43/79/91/100 16/56/84/100 Subvened(i) 40/77/90/100 14/55/83/100 Nonsubvened(i) 56/91/100 29/61/93/100 % subvened receivables (90.53 if upsized) (90.53 if upsized) % nonsubvened receivables 9.45 (9.47 if upsized) 9.45 (9.47 if upsized) Loss allocation (%) Subvened Nonsubvened ABS voluntary prepayments (%) Subvened Nonsubvened Recoveries (%) Recovery lag (mos.) 3 3 Approximate break-even levels (%)(ii) (i)we consider nonsubvened loans to have APRs greater than 4.0% and subvened loans to have APRs of 4.0% or less. (ii)the maximum CNLs on the pool that the transaction can withstand without triggering a payment default on the class A notes. ABS--Absolute prepayment speed. APR--Annual percentage rate. CNL--Cumulative net loss. Using an expected 0.50%-0.60% net loss range, the break-even results show that the class A notes are sufficiently enhanced to withstand a stressed net loss level that is consistent with the assigned preliminary ratings. Sensitivity Analysis In addition to running break-even cash flows, we ran sensitivity scenarios to see how the ratings on the notes could be affected by losses that are moderately higher than our current expectations. Moderate loss scenario: 1.60% (2.0x our minimum 'B' credit enhancement level) Under the 1.6% moderate stress loss scenario (2.0x our minimum 'B' credit enhancement level), we again ran a bifurcated-pool method whereby the nonsubvened collateral defaulted and prepaid faster than the subvened collateral, and losses were allocated disproportionately to the subvened collateral (see table 6). OCTOBER 13,

12 Table 6 Sensitivity Analysis Summary: Moderate Loss Scenario Cumulative net loss level (%) 1.60 Loss timing (12/24/36/48) aggregate (%) 41/77/90/100 Subvened 40/77/90/100 Nonsubvened 48/79/92/100 Voluntary ABS (nonsubvened/subvened) (%)(i) 1.50/0.25 Servicing fee (%) 1.00 Coverage of remaining losses Initially at 4.13x (4.14x if upsized), reaches 5.28x (5.29x if upsized) by month 12, and continues to grow thereafter. (i)we consider nonsubvened loans to have APRs greater than 4.0% and subvened loans to have APRs 4.0% or less. ABS--Absolute prepayment speed. APR--Annual percentage rate. In this scenario, excess spread is released to the depositor every month except for month 61. Interest is paid on a timely basis, and the class A-1, A-2, A-3, and A-4 notes are paid full principal in months 9, 24, 44, and 53, respectively. The results were similar for the upsized structure. The credit enhancement for the 'AAA' rated notes starts off at a 4.13x 13x (4.14x if upsized) multiple, reaches a 5.28x (5.29x if upsized) multiple by month 12, and continues to grow thereafter (see chart 4). Chart 4 OCTOBER 13,

13 The growth in the class A coverage levels reflects the lockout of principal payments to the certificateholders until classes A-1, A-2, A-3, and A-4 are paid in full and the 0.25% nonamortizing reserve account, which grows as a percentage of the outstanding collateral balance as the pool amortizes. Given these results, all else being equal, we expect our ratings on the class A-2, A-3, and A-4 notes to remain within one rating category of our preliminary 'AAA (sf)' ratings. This is consistent with our rating stability criteria, which express a theoretical outer bound for the projected credit deterioration of any given security under specific, hypothetical stress scenarios (for more information, see "Methodology: Credit Stability Criteria," published May 3, 2010). Money Market Tranche Sizing The proposed money market tranche (class A-1, not rated) has a 12-month legal final maturity date on Oct. 18, To test whether the money market tranche can be repaid by month 12, we ran cash flows using assumptions to delay the principal collections during the 12-month period. We assumed zero defaults and a 0.50% absolute prepayment speed (ABS) for nonsubvened loans and a zero ABS for subvened loans in our cash flow run. We also checked that approximately 11 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 long-dated rated tranches (classes A-2 and A-3), we determined the date that the respective notes would be fully amortized in a zero-loss, zero-prepayment scenario and then added three months to the result. For the longest-dated security (class A-4), we added six months to the tenor of the longest receivable in the pool to accommodate extensions on the receivables. Furthermore, in the break-even scenario for each respective preliminary rating level, we confirmed that there was sufficient credit enhancement to cover losses and repay the related notes in full by the legal final maturity dates. Honda Honda is a wholly owned subsidiary of American Honda Motor Co. Inc., which is a wholly owned subsidiary of Honda Motor Co. Ltd. ('A+/Stable/A-1'). Honda Motor Co. Ltd., a Japanese corporation, is a worldwide manufacturer and distributor of motor vehicles, motorcycles, and power equipment. Honda was incorporated in 1980, and its principal offices are in Torrance, Calif. The company provides wholesale and retail financing to authorized dealers in the U.S. and Canada. Related Criteria And Research Related Criteria Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 8, 2016 Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of OCTOBER 13,

14 Collateral Upon A Nonmonetary EOD, March 2, 2015 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 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 Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 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: Select Issues Criteria, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Securitizations By Code Transferors, Oct. 1, 2006 Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006 Related Research Honda Motor Co. Ltd., April 11, 2016 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, Analytical Team Primary Credit Analyst: Jie Liang, CFA, New York (1) ; jie.liang@spglobal.com Secondary Contact: Timothy J Moran, CFA, FRM, New York (1) ; timothy.moran@spglobal.com OCTOBER 13,

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