Subprime Auto Loan ABS Update Amy Martin Lead Analyst Auto ABS Senior Director Structured Finance Ratings Copyright 2017 by S&P Global. All rights reserved. Annual Non-Prime Auto Financing Conference NAF Association Plano, Texas June 1, 2017
Agenda Size Of The Auto Loan And Subprime Auto Loan ABS Markets Subprime Auto Finance Trends Collateral Characteristics Of Subprime Auto Loan ABS Deterioration In Subprime Auto Loan ABS Collateral Performance (Vintage Analysis) Comparison of 18 Issuers To S&P s Subprime Auto Loan Static Index Subprime Auto Loan ABS Ratings Performance Remains Stable Outlook 2
Auto ABS Issuance Tracks Auto Sales U.S. Auto Sales, Auto Lease ABS Issuance and Auto Loan ABS Issuance Auto Lease ABS Issuance ($ Bil) Auto Loan ABS Issuance ($ Bil) Auto Sales (Million Units) 120 18 100 88 100 87 103 89 16 14 $ Billion 80 60 40 37 54 70 74 74 54 45 47 49 67 61 69 68 67 70 12 10 8 6 20 4.4 4.5 3.2 2.3 3.4 1.7 4.7 6.8 14.3 13.3 5.1 8.5 8.3 9.7 10.7 14.0 15.9 17.5 14.3 15.2 4 2 0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Est Auto Sales (Million Units) 3
Subprime Dollar Issuance % Of Total Retail Auto ABS $25 $23.3 $23.1 40.0% $20 $21.6 $16.3 $18.4 $17.6 $20.0 35.0% 30.0% Billion $ $15 $11.6 25.0% 20.0% $10 $8.7 $7.9 15.0% $5 10.0% $2.2 $1.2 5.0% $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 0.0% Issuance ($) % of Total Dollar Issuance 4
Top 3 Subprime Issuers As a % of Subprime Auto Loan ABS 100.0% 95.0% 90.0% 100.0% 90.6% 95.3% 89.7% 85.0% 80.0% 75.0% 72.1% 79.2% 73.7% 70.0% 65.0% 67.1% 65.3% 66.8% 60.0% 57.6% 55.0% 50.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1 Capital One AMCAR AMCAR AMCAR Santander Santander Santander Santander Santander Santander Santander ($7.2 bn) ($9.8 bn) ($6.7bn) 2 AMCAR Capital One CPS DriveTime AMCAR GM Financial GM Financial GM Financial GM Financial ($4.2 bn) GM Financial ($4.4 bn) GM Financial ($4.9 bn) 3 HSBC Drive Santander CAC Pres6ge DriveTime DriveTime CPS Exeter Exeter ($1.7 bn) Exeter ($1.4 bn) Flagship ($1.6 bn) 5
Subprime Auto Loan ABS 2016 46 Transactions, $23.07B Santander & Drive, 29.2% Honor, 0.4% Sierra, 0.6% JD Byrider, 0.5% Tidewater, 0.7% GLS, 0.9% UACC, 1.4% GM Financial, 21.2% First Investors, 1.9% Prestige, 2.8% OneMain, 3.0% CAC, 3.0% UACC United Acceptance Credit Corpora0on CAC Credit Acceptance Corpora0on CPS Consumer Por6olio Services ACA - American Credit Acceptance Flagship & CarFin, 7.1% Westlake, 7.0% DriveTime, 6.6% CPS, 5.2% ACA, 3.7% Exeter, 4.8% 6
Subprime Auto Finance Trends Industry has remained intensely competitive. In response some lenders liberalized their credit standards, loosened verification requirements (POI), and lowered their pricing requirements. Looser credit policies and lower discounts were competitive responses during prior intensely competitive periods. In our view, foregoing income verifications to the magnitude that has been reported in Reg AB II loan level filings started only 2.5 years ago and is isolated. Large lenders are using a risk-based approach to POI. Loan losses have increased for 2015 and 1 st half 2016 originations. Lower recovery rates have contributed to higher losses too. Lender profitability weakened in 2015 and 2016 with some reporting losses. More recently, some lenders have started to self-correct and are tightening their lending standards. 7
Subprime Collateral Trends (ECNL >7.5%) FICO Loan-To-Value (%) WAAPR (%) 600 595 590 585 580 575 570 565 594 594 594 574 575 573 577 577 575 574 572 124 122 120 118 116 114 112 110 108 106 121 120 114 114 115 113 113 112 112 112 110 18 17.5 17 16.5 16 16.3 16.7 16.6 17.8 16.3 17.0 16.616.7 17.3 16.8 17.5 560 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 104 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 15.5 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 8
Subprime Collateral Trends (ECNL >7.5%) % of Loans With Original Term > 60 months Weighted Average Original Maturity 90 80 70 60 50 40 30 20 10 0 69.0 80.7 85.5 73.6 77.5 76.9 81.3 79.2 83.4 83.8 84.5 70 69.5 69 68.5 68 67.5 67 66.5 66 65.5 65 66.9 69.2 69.7 68.0 67.4 67.1 68.0 67.3 68.6 67.9 68.9 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q1 9
Subprime Auto Loan ABS Performance 16.00 Subprime Cumulative Net Losses (%) By Vintage 14.00 2008 Cumulative Net Loss (%) 12.00 10.00 8.00 6.00 4.00 Q1 2016 2015 Modified 2015 2014 2012 2009 2010 2011 2.00 Q1 2016 Modified 0.00 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 2008 2009 2010 2011 2012 2013 2014 2015 Modified 2015 Q1 2016 Q1 2016 Modified Q2 2016 10
Modified Subprime Cumulative Recoveries (%) Modified Subprime Cumulative Recoveries (%) 60.00 55.00 50.00 45.00 40.00 35.00 30.00 25.00 20.00 2013 2014 2015 Q1 2016 Q2 2016 Q3 2016 1 4 7 10 13 16 19 22 25 28 31 34 2013 2014 2015 (iv) Q1 2016 (i) Q2 2016 (ii) Q3 2016 (iii) ( 11
2015 Cumulative Net Losses by Issuer - Subprime 30 25 JD Byrider(CarNow) Subprime Index - 2015 American Credit Acceptance AmeriCredit UACC CarFinance Percent 20 15 American Credit Acceptance Drive CPS Drive Exeter First Investors Flagship 10 Westlake Exeter CarFinance Subprime Index Pres6ge CPS 5 SDART First Investors AmeriCredit Flagship - Months 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Pres6ge Santander (SDART) UACC Westlake JD Byrider(CarNow) 12
2016 Q1 CNLs by Issuer - Subprime 16 14 ACA DriveTime UACC Subprime Index - Q1 2016 American Credit Acceptance AmeriCredit 12 Drive CPS Drive Percent 10 8 6 4 2 Exeter Subprime Index Westlake SDART AmeriCredit CPS Pres6ge First Investors Flagship Tidewater Exeter First Investors Flagship Tidewater Pres6ge Santander (SDART) incl. not rated UACC Westlake Months - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 DriveTime 13
S&P-Rated IG Subprime Auto Loan ABS Are Well Protected AAA credit enhancement levels are high, often covering cumulative defaults of 85%-95% (with recovery rates ranging from 30% to 40%). 60.00% AAA C/E & ECNL Expecta0on on S&P Rated Transac0ons Auto loan ABS delever quickly and c/e levels as a % of the o/s collateral grow due to the sequential nature of the deals. C/E levels have risen in line with higher ECNLs (see chart) We ve been selective when deciding which issuers we can assign ratings to and whether we should cap those ratings given operational concerns. 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Our rating sensitivity criteria prevents us from assigning AAA and AA ratings if they would be downgraded under a BBB moderate stress below AA and A, respectively, over 1 year and below BBB and BB, respectively, over 3 years. AAA' ini6al C/E AAA' break-even WA Original ECNL (those w/ AAA) 14
Subprime Auto Loan Rating Actions* Year Upgrades Downgrades 2004 6 0 2005 0 0 2006 4 0 2007 13 0 2008 5 0 2009 29 0 2010 4 0 2011 34 0 2012 50 0 2013 133 0 2014 57 0 2015 169 0 2016 244 0 YTD March 31, 2017 34 0 Total 782 0 *The upgrades/downgrades do not include those based on ra6ng changes on the bond insurer, if any. All ra6ng ac6ons in the table are credit-related. 15
Subprime Auto Finance Outlook Lower used vehicle values will continue to put upward pressure on losses. Higher interest rates will impact borrowing costs and squeeze profit margins. Providers of capital, including warehouse lenders, will become more selective. Private equity investors are nearing the end of their holding periods and are looking for exit strategies. Consolidations and portfolio sales are likely to increase. History has shown us that these portfolios can be successfully transitioned. 2017/2018 will test whether lenders increase/decrease their use of risk-based income verifications. Reg AB II loan level reporting for public auto loan ABS has focused attention on this topic. Consumer regulatory oversight by various federal and state agencies could result in legal actions and monetary settlements against companies in this industry. Despite negative headwinds, THE SKY IS NOT FALLING. Historically after several years of loan growth and competition-induced weaker lending standards, credit losses rise and some companies fail. Well-managed companies tighten lending standards, secure adequate funding/liquidity, manage costs, focus on collections, remain compliant with all laws, and prepare for a rainy day. 16
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