Photographer: Daniel Acker/Bloomberg

No Credit? No Problem as Auto Lender Taps Subprime Bond Appetite

Skopos Financial, a deep-subprime auto finance company based in Irving, Texas, is packaging $154 million of loans made to borrowers with weak credit -- and some without a credit score -- into bonds rated investment grade.

More than three-quarters of the loans backing the deal are to borrowers with credit scores under 600 and another 14 percent have no credit score at all, according to a pre-sale report by Kroll Bond Rating Agency. That would place the bulk of the obligations well below what’s typically considered good credit.

The offering is the latest prepared by privately backed auto lenders that offload their risk into securities bought by institutional investors. Skopos, which is backed by Lee Equity Partners LLC, the New York-based private equity firm started by Thomas H. Lee, has only been in business since 2012.

Small and thinly capitalized lenders with short track records and little history of surviving difficult credit cycles have gained the most attention in recent years, as regulators flag booming loan volumes and looser underwriting standards. Low interest rates spurring an increasing amount of debt have inflated the market for the bonds. Overall outstanding auto debt now exceeds $1 trillion, Federal Reserve Bank of New York data show.

Used Cars

“What is happening in this space today reminds me of what happened in mortgage-backed securities in the run up to the crisis,” U.S. Comptroller of the Currency Thomas Curry said in an Oct. 21 speech. Regulators understand that auto securities held up during the last crisis, but new kinds of risks appearing in deals sold today make recent underwriting worrisome, he said.

About two-thirds of the loans being packaged into Skopos’ securitization have been taken out by borrowers who are financing used cars. With the loan maturities stretched to almost six years on average, borrowers may be at greater risk of owing more than their cars will be worth if they try to sell them later.

As a result of these risks, investors in the deal are being offered a big cushion against defaults. The securities, marketed by Citigroup Inc., are expected to be rated as high as AA, according to Kroll. Investors who buy them would be protected against the first 48 percent of losses. The “base case” cumulative net loss expectation is 21 percent to 23 percent, the rating company said.

Texas Concentration

Net losses on subprime auto loans packaged into bonds increased in August, the earliest period for which the figures are available, rising to 6.66 percent from 6.54 percent a year ago, according to a report by Standard & Poor’s Ratings Services.

Nearly half of the borrowers whose debt is being financed in this deal are from Texas. Earlier this year, Skopos issued an unrated securitization with the biggest concentration of borrowers also in Texas, but that comprised only 15 percent of the loan pool.

Despite the high number of loans to Texas borrowers, only a handful were in energy-production regions, making the exposure to the oil industry’s downturn “insignificant,” Kroll wrote in its report.

“Although delinquency and losses are currently low, it doesn’t require great foresight to see that this may not last,” Curry said in his speech.

Skopos Chief Executive Officer Dan Porter and Citigroup spokesman Robert Julavits didn’t respond to telephone messages.

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