Expected Loss for HDFS $302MM ABS Low Despite High Credit Losses

Harley MountainsThe cumulative net loss expectation for Harley-Davidson Financial Services’ latest asset-backed securitization is low — 1.5% — regardless of a spike in HDFS credit losses, because the pool is “substantially stronger” than any previous transaction, according to analysts.

Annualized net losses at HDFS have reached the highest level the captive has seen in six years. Net losses reached 1.98% last quarter, compared with 2.04% in 2Q10. However, the captive’s latest ABS — Harley-Davidson Motorcycle Trust 2016-A — shows a “stronger” mix in its pool.

The $302 million securitization — issued earlier this month — is backed by prime motorcycle loans, according to a presale report from Moody’s Investors Service. The loans in the trust have an average Fico of 751, up from 711 in HDFS’s $500 million 2015-2 issuance. “The 2016-A pool has no loans with a Fico score below 670, while almost 30% of the loans in the previous pools had Fico scores below 670,” Moody’s said in the report.

Additionally, the average original term has decreased to 70 months, the lowest original term since 2012. The maximum APR that the loans in 2016-A pool can have is limited to 11%, compared to the 2015-2’s APR limit of 24.5%, said Matias Langer, vice president and senior credit officer of Structured Finance Group (SFG). “The pool is a lot stronger, and lower APR means it’s less risky,” he added.

The 2016-A pool also has fewer used vehicles compared to previous transactions, according to the report. Used vehicles make up 23% of the pool while the previous pools had between 33% and 39% in used vehicles.

“The expected loss is effectively quite lower than before,” said Ujwal Reddy Gondesi, associate analyst for SFG, but that’s because the ABS pool is structurally different and stronger than previous transactions. “It’s not comparing apples to apples, but it’s comparing apples to oranges,” he added. “In terms of future ABS issuance, the risk to investors will depend on how they [HDFS] choose the pool.”

“Our expected loss assumption takes into account the recent drop in resale values of Harley-Davidson motorcycles and the increase in Harley loan pools’ loss severities,” Moody’s said in the report. “We anticipate that increases in production of Harley-Davidson motorcycles and the continuing influx of less-expensive models from Japanese competitors will raise the total supply of motorcycles on the road in North America, thus decreasing motorcycle resale values.”

An increase in losses in the loan pools “will continue a trend that began in 2010,” Moody’s said in the report. “Loss severities on Harley-Davidson loans during the first 12 months since securitization issuance have jumped to nearly 56% for the 2015-1 securitization, up from about 45% for the 2010-1 securitization.” This is similar to the loss severity “during the first 12 months since issuance in Harley securitizations issued just prior to the recession of 2008-09.”

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