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Subprime auto finance company Honor Finance received its second warning last week that its 2016 inaugural securitization is at risk for downgrade.
Kroll Bond Rating Agency placed the deal’s $8.86 million Class C notes on “watch downgrade” because of higher-than-expected losses and continued management turnover, according to a May 23 surveillance report.
Currently, cumulative net losses in the transaction are at 17.63%, — 5.98% higher than the expected 11.65%. Additionally, KBRA’s loss expectation for the deal at closing was between 19.9% to 21.9% based on “collateral mix at closing and the historical performance data,” KBRA noted.
Yet, KBRA’s recent analysis indicates that total losses may reach the 27%-to-29% range.
In February. Honor modified its categorization of defaults and liquidated receivables, which resulted in significantly higher defaults in the transaction. “Delinquency and extension rates are higher than we have seen in other subprime deals,” the report noted.
As of April, delinquency levels were 24.67% and extension levels were 15.82%. Bankrupt receivables were 2.29% and repossessions not yet defaulted are at 7.10%.
KBRA’s first warning was issued in December 2017. Since then, Honor’s co-founders, chief executive officer, and chief financial officer have departed the company. Honor is in the process of evaluating candidates for CEO, according to KBRA.
Honor originally securitized $100 million of loans in December 2016.
KBRA “will continue to monitor the transaction to determine whether a downgrade of the Class C” is necessary, as loan performance continues to fall short of expectations since the deal was established, the rating agency said.