Investors desperately seeking yield in a world awash with meager and even negative returns last week encountered a rare opportunity in fixed income. Skopos Financial, a four-year-old auto finance company based in Irving, Tex., sold a $149 million bond deal consisting of car loans made to borrowers considered so subprime you might call them—we dunno—sub-subprime?
Details from the prospectus show a whopping 20 percent of the loans bundled into the bond deal were made to borrowers with a credit score ranging from 351 to 500—the bottom 6 percent of U.S. borrowers, according to FICO. As a reminder, the cut-off for "prime" borrowers is generally considered to be a credit score of around 620. More than 14 percent of the loans in the Skopos deal were made to borrowers with no score at all. That means the Skopos deal has a slightly higher percentage of no-score borrowers than the subprime auto securitization recently sold by Santander Consumer, which garnered plenty of attention for its dive into "deep subprime" territory.
While the kind of subprime home-loan securitizations that caused so much damage during the financial crisis have yet to return to anything close to pre-2008 volume, issuance of subprime auto loan bonds has been booming as investors scramble to buy new types of riskier, higher-yielding securities.
What sort of return might an investor expect in exchange for purchasing the Skopos deal? Those who bought the riskiest $9.1 million slice of the unrated securitization nabbed a yield of around 7.8 percent. An unrelated sidenote: Things that used to yield 7.8 percent include 10-year U.S. Treasuries in the early 1990s and the Barclays' U.S. junk bond index as recently as 2011.