JPMorgan Chase is returning to the auto loan-backed securitization market after a 14-year hiatus, looking for investors to share some of the credit risk for its burgeoning auto loan portfolio.
According to a report by Fitch Ratings, JPMorgan (NYSE: JPM) markets nearly $ 200 million of investment grade (but not rated AAA) notes that are part of an aggregate $ 1.8 billion transaction of notes linked to the credit.
The offered notes entitle investors to a pro rata share of the principal and interest payments the bank will receive from a $ 1.8 billion benchmark pool of new and used car loans.
All loans have been issued and are managed by the Chase Auto division of the bank. The deal is Chase’s first asset-backed transaction since 2006.
The bulk of the notes issued under the deal – the $ 1.5 billion Class A tranche ($ 1.5 billion in total) – are held by the bank and will not be rated. Fitch rates five tranches of subordinated bonds, all but one with preliminary investment grade ratings.
The largest tranche, which includes Class B certificates totaling $ 141.6 million, has an AA rating – which is linked to the bank’s Fitch issuer default rating of AA (negative outlook) since the ratings are general obligation obligations of JPMorgan Chase.
The loans designated for the Chase Auto Credit Linked Notes, Series 2020-1 transaction represent only a portion of JPMorgan Chase’s $ 18.4 billion managed U.S. auto loan portfolio, according to data from the Fitch report. But the new investment pool is launched after the bank’s second quarter earnings report showed monthly loan and auto rental originations in June jumped 20% year-on-year, leading to a record volume. $ 3.7 billion monthly.
“April saw the lowest level of loan origination and rental arrangements since the financial crisis, but activity rebounded sharply in May and June,” the bank’s chief financial officer Jennifer A. Piepszak said at the meeting. ‘JPMorgan Chase second quarter earnings call on July 14. “And in fact, June ended up being the best month for auto assemblies in our history,”
Investors in CRT Notes will receive interest payments from fixed rate coupons and prorated units on principal claims on 82,854 accounts, most of which are senior loans to borrowers with sound credit histories and high FICO scores (with a weighted average of 769 FICO from the reference pool).
Besides prime debtors, Chase Auto can also boast of low default rates (30-day past due payments) that remain at historically low levels (0.7% in April) despite the COVID-19 outbreak and the related economic downturn this spring. .
Still, the rating agency noted concerns that job losses linked to the pandemic and other economic strains on short-term borrowers could lead to increased demands for payment relief. JPMorgan Chase has excluded deferred-in-place loans from the 2020-1 series benchmark pool. But the loans could still be extended later and be part of the 7.4% of automatic loan accounts in JPMorgan’s managed portfolio that have received extensions, according to the Fitch report.
If defaults and deferrals cause an expected shortage of liquidity to the bank, JPMorgan would suspend principal payments to investors under the terms of the agreement if net credit losses in any given month exceeded a pre-established cap. , according to Fitch.
Unlike typical automotive ABS transactions, the CRT structure of the transaction does not allow investors to fully benefit from the assets for recovery in the event of default.
While JPMorgan Chase has been absent from the post-crisis auto loan securitization business, the institution was an active issuer between 1996 and 2006 (including under its old Chase Manhattan Bank nameplate). The last noted Chase Auto-generated loan securitization sponsored by the bank was the $ 1.2 billion Chase Auto Owner Trust 2006-B in September of the same year.
But Chase has remained active in auto loans for the past decade. It forged a U.S. captive financing partnership with Japanese automaker Mazda between 2009 and 2019 while expanding its indirect channels to more than 12,000 franchise dealers across the country.
General Motors, Ford and Chrysler brand cars are among the vehicles represented in the 2020-1 series pool. The third largest model share in the pool is Tesla electric vehicle loans, accounting for 9.21% of benchmark pool loans.