“A DEBT BELL TINKLES” from Grant’s Interest Rate Observer
11 MARCH 2016 — The Skopos Auto Receivables Trust 2015-2 came into the world on Nov. 9. It is in trouble today, just four months later. Casting about for someone or something to blame, we blame “liquidity.”
Subprime auto loans stock the Skopos trust. There are $154 millions’ worth of those IOUs, and they are not to be confused with Treasury bills. The weighted average FICO score of the trust’s obligors is 543 (the national average is 695). The weighted average interest cost is 20.79%, and the average vehicle vintage is the 2012 model year. The Kroll Bond Rating Agency, passing judgment on the Skopos Trust, reckoned that “base case” losses would reach 21% to 23%.
Losses, in fact, have exceeded those estimates, which threaten what adepts call a “cumulative net loss trigger event.” Should the trigger be squeezed, Irving, Tex.-based Skopos would be obliged to redirect its corporate cash flows to the bondholders.
Bondholders do, for now, seem amply protected. Not so clear are the terms on which America’s subprime auto buyers will continue to be accommodated. Such a trigger event, relates Asset-Backed Alert, “would make it difficult for [Skopos] to continue doing business as usual–and would make it virtually impossible for Skopos to raise additional capital through securitization. Sources said other deep-subprime lenders, including Go Financial and United Auto Credit, face similar pressures due to rising losses among the loans underpinning their securitizations.”
There was a great hurrah in the immediate wake of last week’s employment report; 242,000 new jobs and a headline unemployment rate of 4.9% seemed to connote the thing once called prosperity. Sober second thoughts followed. “When, however, most of the growth is in lower-paying jobs,” observed Steve Blitz, director and chief economist at ITG Investment Research, “the top-line numbers do not likely translate into the kind of spending most models would forecast, including the ones running at the FOMC.” Trudges–still–the nation’s business.
The story with Skopos has perhaps less to do with the rate of the growth in national output than with the rate of production of dollars. On this score, truer words were never spoken than the ones lately uttered to this publication by Christopher L. Gillock, CEO of Colonnade Securities, Chicago. “Everything is improving in the economy at large but not quickly enough for the flood of liquidity that is seeking out yield,” says Gillock. “Just because there is much more liquidity available doesn’t mean there will be good loans to make. When there are no good loans to make, people make bad ones.”
Chair Yellen, please copy.
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