Philippines’ Maiden Auto Loan Backed Senior Bonds Originated by BPI Family Savings Bank Receive Conditional PRS Aaa Issue Credit Rating from PhilRatings
BPI Family Savings Bank (BPI Family) is planning to engage in the Philippines’ first auto loan securitization. In this transaction, BPI Family will be selling a portfolio of auto loans to a newly created bankruptcy remote Special Purpose Trust (the “Issuer”). Ownership of the portfolio will be transferred to the books of the Issuer via a true sale. BPI Family, however, will remain the Servicer of the said portfolio. To fund the purchase of the acquisition of the portfolio, the Issuer will be issuing Senior and Junior Bonds which will be secured by the underlying auto loans in the portfolio.
Philippine Rating Services Corporation (PhilRatings) assigned a Conditional Issue Credit Rating of PRS Aaa to all the Senior Bonds of the Issuer.
Obligations rated PRS Aaa are defined as having “the highest quality with minimal credit risk”. PRS Aaa is the highest rating assigned by PhilRatings.
Furthermore, a Conditional Issue Credit Rating of PRS Aa was assigned to the Junior (Subordinated) Bonds (Junior Bonds) of the said Securitization.
Obligations rated PRS Aa are defined as having “high quality and subject to very low credit risk. The obligor’s capacity to meet its financial commitment on the obligation is very strong.”
The ratings for the proposed Securitization Transaction are considered conditional until the executed documentation for the transaction has been submitted to PhilRatings for review. The conditional ratings were assigned based on draft transaction documents, and will be converted into final ratings once PhilRatings has determined that representations as stated in initial documents are also captured in the final signed documents.
Furthermore, the ratings are based on whether all Bonds will be settled in full by their Legal Maturity Date and not on Expected Maturity Dates and whether all interest on the Senior Bonds will be paid in full and on time when these are due quarterly.
The Securitization Transaction involves the issuance of up to P5 billion worth of Bonds, consisting of Senior Bonds and Junior Bonds in three tranches, namely: Class A1 Senior Bonds (Class A1), Class A2 Senior Bonds (Class A2) and Class B Junior Bonds (Class B). The Bonds are backed by an asset pool of Auto Loans amounting up to P4.8 billion.
Class A1 has an Expected Maturity of 12 months, with a bullet principal payment at maturity and with interest payable quarterly. On the other hand, Class A2 has an Expected Maturity of 36 months, with interest payable quarterly and principal to be amortized quarterly starting from the second year (i.e. month 15) until expected maturity. The Junior Bonds will have an Expected Maturity of 48 months and amortizing after all Senior Bonds are paid with variable interest payable quarterly. The Legal Maturity Date of the transaction, however, is 12 months after the last auto loan in the asset pool matures, translating to roughly 60 months.
The ratings take into consideration the following factors: (1) the auto loans to be securitized are from BPI Family which has a well-managed portfolio of auto loans, with a better payment and collection performance in the past five years compared to the Thrift Banking System average; (2) auto loans to be included in the asset pool have been selected based on stringent criteria, ensuring that the loans are the better performing accounts in BPI Family’s total auto loan portfolio; (3) the historical performance, behavior and payment structure of the underlying asset pool, along with the payment structure of the securitization serve to minimize prepayment and interest-related risk for the Bondholders; (4) the transaction structure and quality of the underlying asset pool offer significant protection for the Senior Bonds and adequate buffer for the Junior Bonds; (5) the Philippine economy is seen to continue its growth trajectory in the medium term indicating relative stability of income of auto loan obligors; (6) the transaction participants are highly capable and experienced; and (7) the remaining tenor of the securitized asset pool (between one year to four years) is relatively shorter than the tenor of securitized receivables in relation to other bond issuances rated by PhilRatings. This effectively reduces the period of risk exposure.
PhilRatings’ ratings are based on available information and projections at the time that the rating review was performed. PhilRatings shall continuously monitor developments relating to the Bonds and its related asset pool and may change the ratings at any time, should circumstances warrant a change.
In the past five years, BPI Family’s Total Loan Portfolio has been performing consistently better than the Thrift Banking System average. BPI Family’s loan portfolio also fared well compared to the Thrift Banking System’s during the Global Financial Crisis which started in 2007. BPI Family’s portfolio reportedly also fared well compared to peers during the Asian Financial Crisis of 1997. This reflects the stringent and effective credit screening and policies of the bank and therefore, the strength and resilience of the underlying asset pool for the transaction. This ensures the soundness of the underlying asset pool and the stability and adequacy of the cash flows resulting from it.
Further indicating the strength of the asset pool is the fact that the auto loans had to pass stringent criteria such as a minimum Loan to Value Ratio (LTV) and no missed payments. These criteria ensure that the auto loans included in the asset pool are prime accounts. It may therefore be expected that the performance of the underlying assets will be slightly better than the historically strong performance of the total auto loan portfolio of BPI Family.
The auto loans and Senior Bonds also have fixed interest rates. This ensures the relative stability of cash flows and spreads of the transaction. There have also been minimal prepayments of auto loans in BPI Family’s portfolio historically further minimizing volatility in relation to the securitization’s cash flow.
The Senior Bonds also benefit from further protection from the subordination of the Junior Bonds in case the allocation of losses in the asset pool can no longer be covered by the excess interest spread or surplus income. Senior Bonds also benefit from its higher rank in terms of payment priority. More importantly, the principal on the Junior Bonds may not be paid until all Senior Bonds have been fully redeemed.
Finally, the Senior Bonds will also benefit from a switch to a pass through structure when certain conditions are met such as a substantial increase in default rate, prepayment rate or a substantial drop in the recovery rate of the asset pool. This will effectively lessen the interest burden on the cash flows since all collections from the asset pool shall be diverted to the paying down of the Senior Bonds instead of in one go at maturity. This will serve to protect the principal amounts of the Bondholders although such will shorten the expected maturity.
The Philippines’ full year Gross Domestic Product in 2013 grew by 7.2%, higher than the government’s expectations of 6% to 7%, despite several challenges that strained the economy during the year. In the first quarter of 2014, the Philippine economy grew by 5.7%, slower than market expectations for a 6.3% growth. This came as the country continued to reel from the impact of natural calamities last year. Per Capita Gross National Income and Household Final Consumption Expenditure for 2013 also increased robustly by 5.8% and 7.9%, respectively, indicating the relative strength of the purchasing power of the Filipino consumer and stability of income of Auto Loan obligors.