Subprime Auto Loan ABS Update Amy Martin Lead Analyst Auto ABS Senior Director Structured Finance Ratings Ines Beato Director Structured Finance Ratings Copyright 2018 by S&P Global. All rights reserved. Annual Non-Prime Auto Financing Conference NAF Association Fort Worth, Texas May 31, 2018
Agenda Size Of The Auto Loan And Subprime Auto Loan ABS Markets Subprime Auto Finance Trends Collateral Characteristics Of Subprime Auto Loan ABS Subprime Auto Loan ABS Collateral Performance (Vintage Analysis) Comparison of Issuers To S&P s Subprime Auto Loan Static Index New Performance Metric Subprime Auto Loan ABS Ratings Performance Outlook 2
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 $ Billion Auto Sales (Million Units) Auto ABS Issuance Generally 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 80 60 40 37 54 70 74 74 54 45 47 49 67 61 69 68 67 73 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 13.5 4 2 0 0 Source: S&P Global Ratings 3
Billion $ Subprime Dollar Issuance % Of Total Retail Auto ABS $30 40.0% $25 $20 $21.6 $16.3 $18.4 $17.6 $20.0 $23.3 $23.1 $25.4 35.0% 30.0% 25.0% $15 20.0% $10 $8.7 $11.6 $11.2 $11.6 15.0% 10.0% $5 $2.2 $1.2 5.0% $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2017 YTD Issuance ($) % of Total Dollar Issuance *Est. 2018 YTD 0.0% Source: S&P Global Ratings *YTD 2018 is estimated through May 31, 2018 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% 79.2% 75.0% 72.1% 73.7% 70.0% 65.0% 60.0% 67.1% 65.3% 66.8% 57.6% 60.5% 55.0% 50.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 CapOne AMCAR AMCAR AMCAR Santander Santander Santander Santander Santander Santander Santander Santander ($7.2 bn) ($9.8 bn) ($6.7bn) ($8.8bn) 2 AMCAR Capital One 3 HSBC Drive Santander CPS DriveTime AMCAR GM Financial GM Financial GM Financial GM Financial GM Financial GM Financial GM Financial ($4.2 bn) ($4.4 bn) ($4.9 bn) ($4.7 bn) CAC Prestige DriveTime DriveTime CPS Exeter Exeter Exeter Flagship DriveTime ($1.7 bn) ($1.4 bn) ($1.6 bn) ($1.9 bn) Source: S&P Global Ratings 5
Subprime Auto Loan ABS 2017 48 Transactions, $25.42B Santander & Drive, 34.5% JD Byrider, 0.5% UACC, 0.6% Veros, 0.7% GLS, 0.7% Prestige, 1.3% CIG Financial, 0.7% First Investors, 2.4% CPS, 3.4% GM Financial 18.6% ACA, 3.4% UACC United Acceptance Credit Corporation CAC Credit Acceptance Corporation CPS Consumer Portfolio Services ACA - American Credit Acceptance Source: S&P Global Ratings DriveTime, 7.4% OneMain, 6.1% Flagship 3.87% CAC, 4.5% Exeter, 5.5% Westlake, 5.9% 6
S&P s Take On Subprime Auto Finance Trends Credit performance remains weak despite lenders tightening their credit standards. The industry remains intensely competitive despite subprime origination volumes declining in 2016 and 2017. Lenders are competing on the basis of price, quick approvals, and limited stipulations. Several subprime auto finance companies are reporting losses due to competitive pricing and higher loan losses, in part due to lower recovery rates. While a few are still building scale to improve margins, others have greatly reduced origination volumes and face liquidity concerns. Some have gone out of business, and we believe others could fail. Private equity and warehouse funding aren t as plentiful as they were earlier in the recovery. Investors have a growing appetite for subprime auto loan ABS. Several issuers have issued B rated classes this year for the first time. 7
Subprime Collateral Trends (ECNL >7.5%) FICO Loan-To-Value (%) WAAPR (%) 600 595 590 585 580 575 570 565 594 594 594 585 578 577 577 574 575 575 573 572 124 122 120 118 116 114 112 110 108 106 121 120 114 114 115 113 113 113 112 112 111 110 18 17.5 17 16.5 16 16.3 16.7 16.6 17.8 16.3 17.0 16.616.7 17.3 16.9 17.8 17.7 560 104 15.5 Source: S&P Global Ratings 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 69.0 80.7 85.5 73.6 77.5 76.9 81.3 79.2 83.4 83.3 84.6 78.1 70 69.5 69 68.5 68 67.5 67 66.5 66 66.9 69.2 69.7 68.0 67.4 67.1 68.0 67.3 68.6 68.5 68.9 67.3 10 65.5 0 65 Source: S&P Global Ratings 9
Vehicle Depreciation Versus Loan Amortization Amount When amortization of the loan balance is spread out over a longer term, the point at which the obligor gains an equity position in the car is delayed. The point at which the vehicle's value exceeds the loan balance comes later and later in the life of the loan as the loan term lengthens. $25,000 Vehicle Value 48 mth term 60 mth term 72 mth term 78 mth term $20,000 $15,000 $10,000 $5,000 $- 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 10
Longer-Term Subprime Auto Loans Are Leading To More Back-Loaded Losses Longer-term loans affect the timing of losses: losses become more backloaded and extend for a longer period of time. We observed a shift in the loss curve to 25-60-84-98-100 for the 2011 vintage from 32-70-90-100 for the 2003 vintage. As the chart shows, the loss curve for the 2011 vintage is slower and longer, and its losses extend into year five. 100% Yearly Vintage Loss Curve 80% 60% 40% 20% 0% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 2003 Vintage 2011 Vintage 11
Cumulative Net Loss (%) Subprime Auto Loan ABS Performance 16.00 S&P s Subprime Auto Loan Static Index - Cumulative Net Losses (%) By Vintage 14.00 2008 12.00 2015 2014 10.00 8.00 2016 2012 2009 2010 6.00 Q1 2017 2011 4.00 2.00 Q2 2017 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 Source: S&P Global Ratings 2014 2015 2016 Q1 2017 Q2 2017 12
Cumulative Net Loss (%) Subprime Auto Loan ABS Performance 16.00 Modified Subprime Auto Loan Static Index - Cumulative Net Losses (%) By Vintage 14.00 2008 12.00 10.00 2015 2014 8.00 2016 2015 modified 6.00 Q1 2017 4.00 2.00 Q2 2017 Q1 2017 Modified 2016 Modified 0.00 Source: S&P Global Ratings Q2 2017 Modified 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 2008 2014 2015 2015 Modified 2016 2016 Modified Q1 2017 Q1 2017 Modified Q2 2017 Q2 2017 Modified 13
Modified Subprime Cumulative Recoveries (%) 60.00 55.00 50.00 45.00 40.00 2016 2015 2013 2014 35.00 Q1 2017 30.00 Q2 2017 25.00 20.00 1 4 7 10 13 16 19 22 25 28 31 34 Source: S&P Global Ratings 2013 2014 2015 (i) 2016 Q1 2017 Q2 2017 14
Percent 2015 Cumulative Net Losses by Issuer - Subprime 40 Subprime Index - 2015 35 JD Byrider American Credit Acceptance AmeriCredit 30 CarFinance CPS 25 American Credit Acceptance Drive DriveTime 20 Exeter UACC DriveTime Drive First Investors 15 10 5 - Exeter CarFinance Westlake CPS Prestige SDART Flagship AmeriCredit First Investors Subprime Index Months 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 Flagship Prestige Santander (SDART) UACC Westlake JD Byrider(CarNow) Source: S&P Global Ratings 15
Percent 2016 CNLs by Issuer - Subprime 30 Subprime Index - 2016 American Credit Acceptance 25 JD Byrider AmeriCredit JD Byrider CPS 20 Drive Exeter 15 Honor DriveTime ACA UACC Sierra First Investors Flagship Foursight 10 5 Drive Exeter Subprime Index Westlake CPS Prestige Tidewater Foursight Honor Tidewater Prestige Santander (SDART) Sierra AmeriCredit First Investors UACC - SDART Flagship Months 1 3 5 7 9 11 13 15 17 19 21 23 25 27 Westlake DriveTime Source: S&P Global Ratings 16
Percent Q1 2017 CNLs by Issuer - Subprime 14 Drivetime 12 Subprime Index - Q1 2017 American Credit Acceptance 10 American Credit Acceptance AmeriCredit CPS 8 Drive Drive 6 Santander (SDART) Westlake Exeter Subprime Index Exeter First Investors Flagship 4 First Investors CPS Flagship Santander (SDART) incl. not rated Westlake 2 AmeriCredit DriveTime - Months 1 Source: S&P Global Ratings 3 5 7 9 11 13 15 17
CNL Pool Factor Performance Analysis CNL Is Only One Factor 16% Cumulative Net Loss (CNL) % of Original Collateral Remaining (Pool Factor) 14% 12% 10% 8% 6% 4% 2% 0% 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627 Month 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 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 Month Westlake Automobile Receivables Trust 2016-1 Exeter Automobile Receivables Trust 2016-1 CPS Auto Receivables Trust 2016-A Westlake Automobile Receivables Trust 2016-1 Exeter Automobile Receivables Trust 2016-1 CPS Auto Receivables Trust 2016-A 18
CNL Pool Factor Analysis Cumulative Net Loss Relative to Orig. Collateral Outstanding (Pool Factor) Westlake Automobile Receivables Trust 2016-1 Exeter Automobile Receivables Trust 2016-1 CPS Auto Receivables Trust 2016-A 16% 14% Exeter 11% CPS 10% 12% 10% Westlake 8% 8% 6% 4% 2% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% Pool Factor 19
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 2017 222 0 2018 YTD (as of May 22) 127 0 Total 1,097 0 *The upgrades/downgrades do not include those based on rating changes on the bond insurer, if any. All rating actions in the table are credit-related. 20
S&P s Subprime Auto Finance Outlook Losses will remain under pressure due to lower used vehicle values. Higher interest rates will inflate funding costs and squeeze profit margins. Providers of capital, including warehouse lenders, have become more selective. We re late into the credit cycle. As we ve seen before, after several years of loan growth and competition-induced weaker lending standards, credit losses rise and some companies fail. Consolidations and portfolio sales are likely to increase. History has shown that auto loan portfolios can be successfully transitioned. Auto loan ABS ratings outlook is stable, but subprime non investment grade classes may incur downgrades. The BB and B rated classes have lower loss-absorbing cushions and mild deterioration could result in downgrades. 21
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