California credit union launches first-time auto ABS transaction

A $3.3 billion-asset California federal credit union is making a rare foray into the asset-backed securities market.

Torrance, Calif.-based Unify Financial Credit Union is marketing a $300 million bond offering that will be secured by a portfolio of select, long-term prime auto loan originations, according to a report issued Thursday by ratings agency S&P Global Ratings.

The transaction represents only the second auto-loan securitization sponsored by a federal credit union since 2017, when the National Credit Union Administration gave the green light for federal credit unions to pursue securitization as a funding source for loans.

Only one other credit union, Tampa-based GTE Finanancial, has pursued this route in a $175 million auto-loan ABS deal in November 2019, offloading about 25% of its managed portfolio of auto loans. That transaction was seen as a potential catalyst for more credit unoins entering the auto ABS space.

Unify’s deal also takes about a quarter of its loan assets off the books, according to S&P, and will place them with institutional investors in the debt market. The securitization also alleviates the institution from holding a large segment of extended-term loans with tenors over six years – maturity schedules which ratings agencies say carry greater risk of default, plus lower recoveries in the event of repossessions.

Nearly all of the loans (for both new and used vehicles) in the pool were issued with original terms of more than 72 months – with 85% having final payment dates stretching between 75 and 84 months after origination, according to S&P’s report.

The trust created to issue the bonds is dubbed UNIFY Auto Receivables Trust 2021-1. The capital structure of the transaction features four senior-note classes for investors to choose from: a one-year Class A money-market tranche totaling $42.2 million in notes; a $109 million Class A-2 tranche due February 2024, a $77 million Class A-3 tranche due June 2025 and a Class A-4 tranche of $40.2 million in notes due July 2026. All of the tranches have preliminary investment-grade ratings – AAA for the multi-year notes and a short-term A-1+ rating for the Class A tranche.

There are also subordinate note classes with IG ratings: a $9.5 million Class B tranche due November 2026 (rated AA); a $7.8 million Class C tranche due April 2027 (A+) and a $14.3 million Class D tranche due November 2029 (BBB).

Nearly all of the loans were originated out of Unify’s Southwest regional footprint, issued both directly to borrowers and indirectly through partnering auto dealerships. The top five states where the loan originations are concentrated are Nevada, California, Texas, Kansas and Arkansas.

S&P’s expected cumulative credit-loss projection for the deal is between 2.75%-3%.

Federal credit unions have been free to sell asset-backed securities since June 2017, when the NCUA’s general counsel issued an opinion that federally chartered credit unions have the authority to issue such bonds under the Federal Credit Union Act and NCUA regulations.

But no credit unions took the plunge until GTE in late 2019. The GTE bond sale prompted speculation in January 2020 from another ratings agency, DBRS Morningstar, that its analysts expected to see more credit unions entering the prime auto ABS market, “especially if the NCUA is involved in providing explicit guidance.”

Under the NCUA, credit unions can issue securities so long as they meet multi-pronged tests that the offering will address member needs as well as satisfy safety and soundness concerns.

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