Bonds from Honor Finance’s only sub-prime auto loan securitisation fell several notches deeper into junk territory on Wednesday amid growing concerns the deal could take a rare write-off.
S&P cut the ratings on its US$8.86m C class of bonds by four notches to Triple C plus from Double B minus, signaling a potentially high risk of default.
“We are downgrading class C to ‘CCC+ (sf)’ to reflect that the class is currently vulnerable to non-payment,” S&P said.
Under the ratings agency’s base-case scenario, cumulative net losses are expected to rise to about 31% over the next two years, which would result in the C class taking a 2% write-off.
Net losses are currently at 19.99%, up from 11.9% five months earlier, according to bond data tracker Intex.
Only two defaults have occurred on sub-prime auto ABS rated by S&P. Both were classes with initial ratings of Double B and happened only after a pair of lending companies failed between 1997 and 1999.
But that could change as higher risk bonds are sold.
S&P’s ratings on Honor’s senior A and B classes were unchanged at Single A and Triple B, respectively.
Honor originally sold US$100m of bonds in December 2016. The bonds bundled used car loans to high-risk borrowers at rates that averaged 25.97%, according to KBRA.
The transaction came under the spotlight this spring after loan losses spiked to 16.41% in April from 14.97% in March.
Higher losses were part of what prompted both S&P and KBRA to put the deal’s C class on watch for downgrade.
But rising loan delinquencies, liberal use of loan extensions and top-level company departures were also points of concern.
S&P also said that Honor stopped making new auto loans at the end of May and is in discussions with a third party to take over various servicing functions.
Industry players have been expecting a shake-out among weaker players in the sub-prime auto for some time.
“About every 10 years since the mid-1990s, the sub-prime auto loan sector and related ABS market have experienced a growth phase followed by a contraction period,” S&P said in a separate report in June.
In March, Pelican Auto Finance was taken over by Westlake Financial Services. Bankruptcies were also filed by Summit Financial Corp and Ace Motor Acceptance Corp.
“Fortunately for ABS investors, none of these entities had any auto loan ABS outstanding,” S&P wrote.
