Valley Strong CU Closes 3rd Securities Deal

Valley Strong Credit Union sponsored its third batch of securities backed by its former auto loans in a $331.7 million issuance that closed Tuesday.

The deal brought the year’s total of auto-backed securities by credit unions to $732 million, following the $400 million deal that closed March 14 by GreenState Credit Union of North Liberty, Iowa ($11.4 billion in assets, 451,291 members as of Dec. 31).

According to a report from the Kroll Bond Rating Agency (KBRA) of New York, Valley Strong ($4 billion in assets, 313,735 members) closed a second deal worth $305.9 million in October 2023. The credit union’s first deal was a “private placement” in April worth as much as $110.6 million based on NCUA loan sales data.

Credit unions began selling auto loan-backed securities in 2019, and now have sold as much as $4.1 billion.

The latest Valley Strong securities will be sold in seven tranches. The first six tranches, maturing from April 2025 through July 2030, received investment-grade ratings from Moody’s and KBRA. The final, $35.7 million tranche received a “BB-“ junk rating from KBRA and was not rated by Moody’s.

The securities, measured from a statistical pool as of Feb. 29, consisted of 94% loans on used cars and light trucks and 76% loans to subprime borrowers (FICO scores below 660). The pool also had:

• An $26,908 average remaining loan size.
• 630 weighted average FICO score.
• 122% weighted average loan to value ratio.
• 16.15% weighted average annual percentage rate (APR).
• 76.51 months weighted average original term.
• 74.53 months weighted average remaining term.

Exeter Finance originated the loans through auto dealers based on criteria set by Valley Strong. It then sold the loans to Valley Strong (the deal’s sponsor), but Exeter Finance remains the loans’ servicer.

The credit union then picked out the loans for the securitization. At closing, the credit union sold them to an entity called VStrong Depositor LLC (the depositor), which is a wholly-owned, limited purpose subsidiary of the credit union. VStrong Depositor then sold the loans to VStrong Auto Receivables Trust 2024-A (the issuing entity).

As with all credit union asset-backed transactions, the ratings agencies consider the unlikely “repudiation risk” if the credit union were to go belly up, the NCUA takes over and decides to cancel the credit union’s obligations. The NCUA has established “safe harbor” rules to mitigate that risk, but Moody’s pre-sale report said the design of this deal does not meet the requirements to enjoy that protection.

“Unlike all other credit union sponsored auto ABS transactions that we have rated, the transfer of the receivables from VSCU to VStrong Depositer, LLC (the depositor) will not qualify for the NCUA Safe Harbor. However, to achieve legal isolation of the assets, the NCUA Safe Harbor is non-exclusive, and VSCU has structured the securitization transaction in a manner intended to limit or eliminate the ability of the NCUA, as conservator or liquidating agent for VSCU, to exercise authority with respect to the receivables and the transaction documents,” the report said.

“VSCU and the depositor intend that the transfer of receivables from VSCU to the depositor is a sale, and the depositor and issuing entity likewise intend that the transfer of receivables from the depositor to the issuing entity is a sale. Following the transfers, the receivables will not appear on the books and records of VSCU or the depositor, and each of VSCU and the depositor will have separate financial statements that do not include the receivables,” the Moody’s report said.