Weekly Wrap: Another month of declining CMBS delinquencies

Ratings for asset-backed bonds secured by subprime auto loans issued by Tidewater Finance Co., Byrider Finance and e-commerce retailer Carvana Co. (NYSE: CVNA) unit were upgraded or affirmed this week by Kroll Bond Rating Agency, in response to improved payment performance from borrowers who have weathered COVID-19 strains.

S&P Global Ratings also provided various ratings upgrades and affirmations on several pools of subprime auto loans origianted and serviced by Global Lending Services.

On Wednesday, Kroll affirmed ratings on six classes of notes from Tidwater Auto Receivables Trust 2020-A and removed the credit-watch status on a Class E tranche from the deal, which had been under "developing" scrutiny by the agency since April over potential concerns of how subprime borrowers would manage payments under uncertain economic conditions surrounding the COVID-19 outbreak.

Tidewater's COVID-relief program had a peak extension rate of 8.47% in April, but that has since declined to 2.32%. And after a loan-collateral review in the August 2020 collection period, the initial pool principal balance of $193.9 million has been reduced to $172.52 million (a pool factor of "84.95%) and the cumulative net loss to date came in at 0.3% – which is less than half what Kroll had originally projected when the deal closed six months ago.

Although the delinquency rate is at 5.86%, "total deliquencies are in line with historical levels across other outstanding [Tidewater trust] transactions."

Kroll on Wednesday also affirmed ratings on six classes of notes and raised ratings on three other tranches issued by Byrider's CarNow Auto Receivables Trust (CNART) between 2017 and 2019. Kroll raised the ratings on CNART 2017-1's Blass B notes to AA+ from A+ and the Class C notes to BBB+ from BBB-, plus the Class B notes on CNART 2018-1 to AA status from A+.

Byrider is a used-vehicle retailer focused on the deeper subprime segment of credit-troubled borrowers with FICOs generally below 620. The COVID forbearance program that peaked at 16.9% of Byrider's managed portfolio was 2.42% as of Aug. 31, closer to pre-COVID levels.

On Monday, Kroll upgraded 16 ABS ratings and affirmed 11 others from the five Carvana Auto Receivables Trust transactions the online used-car company has sponsored since launching its securitization platform in 2019. The agency also removed the potential downgrade threat against the lowest-rated tranche of Carvana's most recent deal.

The upgrades were assigned to several of the subordinate tranches in all five deals, while Kroll affirmed the triple-A ratings on all five.

"Carvana has been granting borrowers short-term payment relief in the form of deferment and loan extensions," Kroll's report stated. "[Kroll] has not observed any impact on portfolio performance at this time."

The ratings actions took place a week after Carvana announced record growth in second-quarter revenues and sales, feeding a continued surge in company stock value that has reached 670% growth since the depths of the March coronavirus crisis when many investors feared the depths of a pandemic-induced recession.

S&P on Thursday announced it was raising ratings on four classes of notes from GLS Auto Receivables Trust 2017-1 and 2018-1, plus nine classes of notes from GLS Auto Receivables Issuer Trust 2018-2, 2018-3, 2019-1 and 2019-2. The agency also affirmed ratings one one note class of the GLS Auto Receivables Trust 2017-1 deal, and six classes from the four deals from the GLS Auto Receivables Issuer platform.

Six of the upgrades included notes that now have AAA status, revised from AA status, as the agency announced it was removing a previously placed ratings cap on GLS' outstanding transactions due to the lender's "continued profitability" and portfolio growth management while maintaining underwriting standards.

The affirmations and upgrades were assigned even as S&P noted it had made an "upward adjustment" on projected losses to account for the COVID-19 recession.

Upstart Network’s third securitization of unsecured, nonprime consumer loans is absent any of the risky, 84-month loans that the online marketplace lender offers to borrowers.

But it will still have higher net-loss expectations, due to a growing share of five-year loans compared to two previous securitizations the San Mateo, Calif.-based company included in its two prior 2020 asset-backed deals.

According to presale reports, the $296.54 million Upstart Securitization Trust 2020-3 transaction will feature three classes of notes, including a single-A rated Class A tranche of $190.96 million in bonds.

The senior notes along with the $39.65 million Class B notes (with preliminary triple-B ratings from Kroll Bond Ratings Agency and DBRS Morningstar) plus a $47.94 million Class C tranche will be secured by 21,444 loans with a collective pool balance of $330.87 million.

Nearly all of the loans will be acquired from Goldman Sachs, the trust’s depositor and co-sponsor of the transaction.

The Class A notes benefit from the 14.25% overcollateralization total, as well as 29.15% of subordinate note support and a 0.5% fully funded reserve account.

The loan pool will consist entirely of either 36-month program loans (24.66% of the pool) and 60-month program loans, which at 75.34% represent the highest five-year loan concentration in an Upstart pool since last December’s Upstart 2019-3 deal (which had nearly 80% of the pool consisting of 60-month term accounts).

Upstart has excluded any loans that had been granted temporary relief for borrowers impacted by the coronavirus pandemic. Those loan mods peaked at about 5.6% in mid-May, and have since decreased to approximately 1.4% of the portfolio, according to the presale reports.

DBRS has a net loss assumption of 18.11%, driven by a default assumption of 19.07% based on expected near-term impact on deal performance of the COVID-19 outbreak.

Kroll estimates a base case net loss of 17.8% for the life of the deal, or a range of 16.8%-18.8%, compared to 15.55%-17.55% for Upstart’s deal in February due to the increased share of five-year loans.

The deal will add to a recent surge in marketplace lending transactions. According to Deutsche Bank research, four deals priced in September totaling $1 billion, bringing year-to-date ABS marketplace issuance to $7 billion. That compares to $11.4 billion through the first nine months of 2019.

Suspended payments stabilized between Sept. 14 and Sept. 20 in one part of the mortgage market where they'd been rising, according to the Mortgage Bankers Association.

The forbearance rate for mortgages in Ginnie Mae securitizations, including those insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs, remained unchanged at 9.15%. However, concern about payment suspension activity in this part of the market persists.

"The recent uptick in forbearance requests, particularly for those with FHA or VA loans, is leaving the Ginnie Mae share elevated," Mike Fratantoni, the MBA's senior vice president and chief economist, said in a press release.

The overall share of loans in forbearance continued to decline in the MBA's latest survey, falling 6 basis points to 6.87% from 6.93% the previous week. The share of Fannie Mae and Freddie Mac loans with suspended payments also continued to fall, dropping 9 basis points to 4.46% from 4.55%.

Following a 19-basis-point drop the previous week, the share of loans in forbearance within the private market for portfolio loans and residential mortgage-backed securities held at 10.52%.

Under the terms of the CARES Act, borrowers with government-related loans can put their payments on pause for six months, with a one-time extension for another six months if needed. They must later repay the amount forborne.

Loans in forbearance tracked in the latest MBA survey broke down as follows: 68.37% were in extended plans, 30.26% were in the initial forbearance stage and the remaining 1.37% represented loans that re-entered forbearance after exiting it. That breakdown is very similar to that seen one week earlier.

Monthly amounts servicers are responsible for advancing to investors due to forbearance total $6 billion, according to estimates Black Knight extrapolated from its McDash Flash data set last Friday. That total breaks down into $4.4 billion in principal and interest, and $1.6 billion in taxes and insurance.

The industry obtained limited relief from its responsibility for servicing advances from government intervention, such as monetary policy stimulus that has fueled strong origination activity. But servicers remain concerned about having to temporarily cover payments borrowers aren't making.

Bonnie Sinnock

JPMorgan Chase & Co. wants to help turn airline and hotel loyalty points into an asset akin to stocks or corn futures.

The bank is working with Affinity Capital Exchange to let companies turn rewards programs into a standardized, exchangeable currency to be traded by institutional investors and used as collateral to raise capital, according to a statement Thursday.

Through the partnership, massive loyalty programs can be converted into pieces, or “reserve points,” sold to investors like hedge funds or banks on the ACE marketplace, and later traded on the same venue.

“We’re essentially creating an asset class,” Andreas Pierroutsakos, a managing director at JPMorgan, said in an interview. Traditionally, companies sell points directly to banks. “But there are many other investors that want access,” he said. “This is opening the door for that.”

Frequent-flyer programs generate billions in revenue for the largest airlines through agreements in which carriers sell their points to banks which award them to credit-card customers. Pledging miles programs as collateral for debt financings has become a popular way for cash-strapped airlines to raise funds to get them through the pandemic. Using the ACE platform, a company could pledge a slice of its loyalty program as collateral instead of the entire thing.

“In an ideal world, reserve points become the way that people get exposure to loyalty programs and the instrument becomes a key part of how issuers of loyalty programs finance and sell across the capital structure,” said Akrati Johari, co-head of North America digital innovation in JPMorgan’s corporate and investment bank.

Pierroutsakos likened the project to the leveraged loan-market. Initially, banks were the only ones that bought and sold the loans. Now, the loans are traded among investors.

Through the agreement, JPMorgan has the exclusive right to help companies issue instruments backed by reserve points using ACE’s points-exchange platform. The New York-based bank is also assured the same pricing terms as other investors in the secondary market.

United Airlines Holdings Inc. sold $6.8 billion of bonds and loans backed by its MileagePlus program in June, increasing the financing from a planned $5 billion after receiving strong investor demand. In September, Delta Air Lines Inc. borrowed $9 billion against its frequent-flyer program in the largest airline debt sale on record.

ACE and JPMorgan are looking to take things a step further.

“Think of it as a way to take emergency financing and make it recurring, renewable source of liquidity, not a once-and-done event,” said ACE CEO and founder Atanas Christov.

Bloomberg