Sign Of The Times: Santander Floats First "Deep" Subprime Deal Since Crisis

Last week, we took an in-depth look at several of Santander Consumer’s subprime auto ABS deals. Santander is the largest subprime auto lender in the country with more than $15 billion in outstanding loans to underqualified buyers. Not surprisingly, the company also dominates the subprime auto ABS space accounting for a disproportionate share of YTD issuance. We noted that Santander’s first deal of 2015 (SDART 2015-1) carried an average FICO of 595, an average APR of 16.20%, and an average term of 70 months…

We went on to detail how Santander was set to float a new deal that looked even worse called DRIVE 2015-A. As the NY Times reports, the securitization “sold out in a matter of hours,” with the highest rated tranche yielding just 1%, proving beyond a shadow of a doubt that artificially suppressed interest rates are driving investors to take bigger and bigger risks as they desperately search for any semblance of yield. 

More, via NY Times

Delinquencies on auto loans have been rising, more Americans are losing their cars to repossession, and inquiries have begun into the subprime auto industry’s lending practices.


Nevertheless, Santander Consumer USA had little trouble last week finding buyers for its latest bond deal made up of auto loans to borrowers with deeply tarnished credit.


Many of the loans bundled into the $712 million deal went to borrowers with significantly lower credit scores than in many of Santander’s past bond deals.

Moody’s Investors Service expects losses as high as 27 percent on the bond, much larger than the 17 percent loss that the ratings firm had projected on a bond that Santander sold last year.


It’s easy to see the attraction for investors. Yields on the highest rated slice of the Santander bond were 1.02 percent, compared with the equivalent Treasury bond yield of 0.12 percent, according to Empirasign Strategies, a market data firm. In short, investors could earn about eight times as much yield, while ostensibly taking the same amount of risk.

As a reminder, the average FICO on this deal is just 552, according to Structured Finance News and nearly 13% of the loans backing the paper were made to borrowers with no FICO score at all. The truly remarkable thing about this particular deal is the degree to which it represents a complete round trip to the conditions that persisted pre-crisis: 

For Santander, the latest bond represented a shift.

Santander has always made loans to borrowers with very tarnished credit. But the lender has usually financed those loans through private deals or held them on its books, instead of tapping the public market, according to a person briefed on the matter.


The latest bond deal was the first time that it has publicly sold securities backed by auto loans with such low credit quality since the financial crisis. The timing of the deal was driven by two factors: investor demand and a desire by Santander to free up more capital.

Put simply: the company wants the loans off its balance sheet so it can make yet more bad loans which it will also move off its balance sheet in order to make still more, and on and on. This is precisely the mentality that existed when the mortgage securitization machine was set on overdrive and it represents a dangerous turn of events at a time when even the market for highly-rated corporate paper is facing a liquidity crisis. 

Delinquencies in the subprime space are already on the rise and in a pinch just about the last thing anyone is going to want to buy is paper backed by used car loans to unemployed borrowers with no credit. But as long as $700 million deals are going off without a hitch thanks to the global proliferation of NIRP, you can expect things to get far worse before they get better especially now that CNBC has unleashed the car-stock arbitrage on the few viewers the network has left.