KBRA Assigns Preliminary Ratings to U.S. Auto Funding Trust 2020-1

Kroll Bond Rating Agency (KBRA) assigns preliminary ratings to four classes of U.S. Auto Funding Trust 2020-1 (“USAUT 2020-1”), a $258.77 million auto loan ABS transaction collateralized by a pool of retail automobile contracts, made to subprime obligors and secured by used automobiles.

U.S. Auto Finance, Inc. (“U.S. Auto” or the “Company”) previously issued its first rated securitization (“USAUT 2019-1”) in April 2019 along with two unrated deals in September 2017 and October 2018. The structure and collateral for USAUT 2020-1 are generally similar with USAUT 2019-1. However, USAUT 2020-1 has higher enhancement for all classes compared to the prior deal. The transaction has initial hard credit enhancement levels of 53.05% for the Class A Notes through 22.60% for the Class D Notes. Credit enhancement consists of excess spread, overcollateralization, subordination (except for the Class D Notes) and a reserve account funded at closing.

U.S. Auto is a subprime auto sales and finance company founded in 1992 and headquartered in Duluth, GA. The Company operates a direct lending model in which it originates 100% of loans through its 31 company-owned stores located in Georgia, South Carolina, North Carolina and Florida. In June 2015, Milestone Partners purchased a majority interest in U.S. Auto from its founders and currently owns 77.8%. Milestone Partners is a private equity firm focused on control buyouts of lower middle market businesses and has managed over $900 million of original capital commitments and closed over 100 transactions representing over $3.5 billion of value.

The financial impact of COVID-19 has resulted in an economic slowdown and high unemployment, which can adversely impact the performance of auto loans, including those supporting the subject transaction. Owing to this risk, KBRA increased its base case default assumptions for the subject pool in a manner that was similar to recent portfolio reviews of the sector. A review conducted in April 2020 resulted in the Class D rating from USAUT 2019-1 being placed on Watch Downgrade. The Watch Status Placement was maintained in a more recent review in July 2020, at which time the ratings on the senior classes were affirmed. For more information on the reviews, see Auto Loan and Auto Lease ABS Securities Maintains Watch Report and U.S. Auto Loan and Auto Lease ABS Securities on Watch Report.

KBRA applied its Global Auto Loan ABS methodology and its Global Structured Finance Counterparty Methodology as part of its analysis of the transaction’s underlying collateral pool, the proposed capital structure and U.S. Auto’s historical static pool data. KBRA also conducted an operational assessment on the originator and servicer, as well as a review of the transaction’s legal structure and transaction documents. KBRA will also review the operative agreements and legal opinions for the transaction prior to closing.

Click here to view the report. To access ratings and relevant documents, click here.

Related Publications

• U.S. Auto Funding Trust 2020-1 KCAT
• Global Structured Finance Counterparty Methodology
• Global Auto Loan ABS Rating Methodology

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

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