Premarketing: Western funding $400M debut subprime auto ABS

Premarketing: Western funding $400M debut subprime auto ABS

Western Funding has recently announced a $400 million debut issuance of subprime auto asset-backed securities (ABS). This move reflects the growing trend in the automotive lending landscape, characterized by a shift towards non-traditional data and strategies [1].

The current automotive market is marked by significant disruptions, including supply chain issues, inventory shortages, and high vehicle prices. These challenges have led to an increase in loan delinquencies, pushing lenders to adopt more nuanced risk assessment methods. Western Funding's subprime ABS issuance aligns with the broader trend of diversifying lending options beyond traditional banking institutions, offering consumers more flexibility and lenders a new avenue for risk management.

One notable trend in the auto lending market is the expansion of year-over-year (YoY) balances held by lenders outside of traditional banks. This accounts for approximately one-third of outstanding balances, indicating a diversification in the lending market [1]. Western Funding's subprime ABS issuance is a testament to this diversification, as it targets borrowers who may not qualify for prime lending but can still manage their debts responsibly.

The issuance also highlights the increasing importance of non-traditional data in structuring deals and approval strategies. Factors like payment-to-income ratio and loan-to-value ratio play pivotal roles in assessing risk, providing a more comprehensive understanding of borrower profiles [1]. By focusing on these factors, Western Funding aims to optimize its lending process and profitability.

While the overall originations in the auto lending market have decreased by 5.3% YoY, captive and other monoline lenders have shown growth, particularly in super-prime lending [1]. Western Funding's $400 million subprime ABS issuance underscores the potential in the subprime market, as it targets borrowers who may not fit the super-prime profile but still represent a viable risk.

In conclusion, Western Funding's $400 million subprime auto ABS debut is a strategic move that reflects the evolving trends in the automotive lending landscape. By leveraging non-traditional data and targeting a diversified borrower base, Western Funding aims to capitalize on the growing opportunities in the subprime auto market.

References:
[1] https://www.equifax.com/business/blog/-/insight/article/auto-insights-how-to-move-forward-given-current-trends/