Low recovery values from repossessions are one of the key factors that separate the rating of a powersports securitization from an auto transaction, Alla Mikhalevsky, a director at Kroll Bond Rating Agency, told Powersports Finance.
Octane Lending issued an inaugural $210.9 million securitization last week, and one weakness of the deal was the value of powersports vehicles after they are repossessed.
“In the event that a borrower goes delinquent or is charged off and the vehicles are repossessed, we would expect the recovery value to be lower than what is realized in the auto industry,” Mikhalevsky said. “There’s a fairly robust automobile auction process, while the secondary market is relatively thin for powersports vehicles. Octane utilizes industry participants to remarket these vehicles to other dealerships or go through powersports specific auctions. Given the less liquid secondary market and greater wear and tear on these assets, recovery amounts would be lower.”
Octane’s securitization consisted of four loan tranches, the highest of which was rated A Class. By comparison, auto lenders First Investors Financial, Carvana and Foursight Capital — which have loss rates and borrower characteristics similar to Octane’s — each had three tranches rated higher than A, according to KBRA.
Similarly, the cumulative net loss range for Octane’s securitization is 10.25% to 12.25%. The auto lenders, meanwhile, have net loss expectations ranging from 6.75% to 11.80%.
KBRA assigned assumed a 25% recovery rate to Octane’s transaction, five percentage points lower than the lender’s average for recoveries as a percent of charged-off amounts, according to the presale report. Octane has recovered 62.4% of the balance on located assets year-to-date.
While recoveries separate auto and powersports transactions, the two industries share similarities, Mikhalevsky said. For example, auto and powersports lenders partner with dealerships to finance vehicles for consumers. However, “a powersports vehicle is a discretionary product versus a car, which has a higher utility,” Mikhalevsky explained. “Loans associated with essential assets are expected to rank higher on the payment hierarchy compared to discretionary assets.”