Another Company Just Joined the Hot Market Market for Subprime Auto Bonds

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Add another auto lender to the list of those capitalizing on booming demand for bonds backed by financing for car buyers who are prone to default.

GFC Lending LLC, which does business as GO Financial, is planning to issue $180 million of securities tied to subprime loans made via applications submitted by car dealers, its first securitization, according to a presale report from Kroll Bond Rating Agency. The bonds, which are backed by about $257 million of loans, may be rated as high as A by Kroll.

GO Financial describes itself on its website “as part of a large enterprise of companies operating in the automotive sales and finance sector.”

It was founded in 2011 as a unit of DriveTime Automotive Group Inc., a used-car seller that’s been in the subprime finance business for 21 years, before being spun off two years ago to Chairman Ernest C. Garcia II, according to the report. Last year, Cox Enterprises Inc., which owns car-related businesses including auctioneer Manheim, AutoTrader.com and Kelley Blue Book, bought a stake in the new lender that’s grown to 49 percent.

The market for subprime auto bonds expanded to $36 billion outstanding on March 30, from as little as $13 billion in 2010, as the 2008 credit crunch faded and the Federal Reserve engineered demand for higher-yielding investments, according to Securities Industry & Financial Markets Association data. Other new issuers have included Skopos Financial, Blackstone Group LP’s Exeter Finance and Perella Weinberg Partners-backed Flagship Credit.

Loan Losses

Kate Moore, associate general counsel at Mesa, Arizona-based GO Financial, declined to comment on the bond sale by the lender, which provides loans through independent car dealers. DriveTime, which still provides some services to GO Financial, is a leading U.S. used-vehicle retailer that focuses on both the sale and financing of cars, according to Kroll.

The credit grader said it expects “base case” losses of 34 percent to 37 percent on the loans in GO Financial’s first deal. That’s “substantially” more than DriveTime’s loans, in part because of its use of different origination channels and lower-quality borrowers. More than 30 percent of borrowers lack the credit scores known as FICOs.

Issuance of subprime-auto securities this year totals about $9.1 billion even amid rising delinquencies and defaults on the underlying loans, compared with about $8.3 billion in the second half of 2014, according to data compiled by Bloomberg.

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