PenFed Sells $460 Million in Securities Backed by Auto Loans

Pentagon Federal Credit Union announced Monday it sold $460.3 million in securities backed by prime auto loans — its first automotive ABS sale and the third among credit unions.

PenFed of Tysons, Va. ($36.7 billion in assets, 2.8 million members as of June 30) is the nation’s third-largest credit union and the seller of the largest batch of securities based on credit union auto loans.

GTE Financial Credit Union of Tampa, Fla. ($2.8 billion in assets, 229,584 members as of June 30) was the first with a $175 million issue sold in Nov. 2019. Unify Financial Federal Credit Union of Torrance, Calif. ($4.2 billion, 285,609 members) followed with a $300 million issue in March 2021.

PenFed was the third-largest auto lender among credit unions with $5.5 billion in new and used loans on its balance sheet as of March 31. As of June 30, it had $6 billion in auto loans, up 41% from a year earlier, and accounting for about 20% of its total $30.6 billion loan portfolio.

Besides the gain from the sale, it will retain servicing rights, earning 1% of collections each year from the loans, which mature from September 2023 to June 2030.

“PenFed is proud to announce our first auto loan securitization,” PenFed President/CEO James Schenck said. “Entering the securitization market will reduce interest rate risk, increase liquidity and strengthen net worth.”

The asset-backed notes, PenFed Auto Receivables Owner Trust 2022-A (PAROT 2022-A), were offered in four senior and three subordinate tranches of notes and given investment-grade ratings by S&P and Fitch. The lowest rating was BBB, and they assigned it to the final $9.2 million in subordinate securities maturing in 2029 and 2030.

“PenFed is pleased that the auto loan securitization offering was very well received by the market,” PenFed CFO/EVP Jill Streit said. “We plan to leverage securitization as a tool to further diversify liquidity and funding options, adding additional protections for PenFed members.”

S&P’s report said PenFed had $1.1 billion in direct auto loans on the books as of April 30, down from $1.5 billion on Dec. 31. S&P said characteristics of PenFed’s direct auto loans included:

• 64-month weighted average original term, up from 62 months on Dec. 31, 60 at the end of 2020 and 57 at the end of 2017.
• 3.60% APR, up from 3.34% on Dec. 31.
• 762 weighted average FICO score, down from 776 on Dec. 31 and 783 at the end of 2019.
• 40% new vehicles, down from 44% on Dec. 31 and 50% at the end of 2018.
• 91% weighted average loan-to-value ratio, up from 87% on Dec. 31.

The loans in the ABS pool were of higher quality.

Fitch said the pool excluded loans with original terms more than 84 months, borrowers in a bankruptcy proceeding, a payment more than 30 days past due, and a model year of 2014 or older.

The pool also excluded borrowers with a FICO score under 600. Fitch said the pool has a weighted average FICO score of 770, with 65.7% having FICO scores above 750 and only 10.9% below 700.

S&P reported the average loan in the pool had a $19,745 average balance, a 3.86% APR with an average of 48 months remaining on an average 66-month term. The pool was 44.1% for new vehicles and the average weighted loan-to-value was 86.9%.

Nearly 30% of the amount is from three states: Texas (10.2%), California (9.9%) and Florida (9.6%).

S&P expects cumulative net loss of 1.40% to 1.60% of the initial receivables balance, which was higher than the 1.05%-to-1.15% loss range of one comparison issue, and lower than the 2.75%-to-3.00% range of the other comparison issue. It noted that its estimates were limited to data going back only to 2017.

“Without reviewing a historical vintage that paid off before the pandemic, it is difficult to determine how the portfolio would perform in an environment without the benefit of government stimulus and assistance, or even in a stressed economic environment,” the report said.

J.P. Morgan Securities LLC acted as the structuring lead manager of the transaction and Wells Fargo Securities, LLC, acted as joint lead manager.