S&P Rates Arcadia Automobile Receivables Trust 1998-C
23 September 1998
S&P Rates Arcadia Automobile Receivables Trust 1998-C
NEW YORK, Sept. 23 -- Standard & Poor's today assigned its
ratings to Arcadia Automobile Receivables Trust 1998-C class A-1, A-2, and A-3
notes (see list below).
The triple-'A' rating on the class A-2 and A-3 notes is based on an
insurance policy provided by Financial Security Assurance Inc. (FSA, triple-
'A' financial strength rating) that guarantees timely payment of principal and
interest. While FSA is also insuring the class A-1 notes, the 'A-1'-plus
rating is not based on the policy, but rather on internal credit
support and cash flow projections.
The underlying transaction risk assumed by FSA has been determined to be
consistent with an investment-grade rating based on a sound legal structure
and internal credit support. Annual excess spread of approximately 9.5% and a
reserve account provide a sufficient multiple of estimated cumulative net
losses.
The class A-1 notes have a legal final maturity of 12 months and benefit
from 100% of principal collections and excess spread until retired. Cash flow
projections created with conservative assumptions are used to test cash flow
coverage of timely interest and repayment of principal by the final maturity
of Sept. 15, 1999. These assumptions included a slow absolute prepayment speed
(ABS) of 0.5%, zero losses, high delinquencies, and the purchase of subsequent
receivables on the last day of the funding period, Nov. 15, 1998.
Arcadia Financial purchases, securitizes, and services consumer
automobile loans originated primarily by car dealers affiliated with major
foreign and domestic manufacturers. Arcadia Financial's 18 regional buying
centers, located in 15 states, are currently working with a dealer network in
45 states. Servicing is performed in its national customer service center in
Minneapolis, Minn., along with four regional collection centers located in
Charlotte, N.C.; Dallas, Texas; Denver, Colo.; and Minneapolis.
During the second quarter ended June 30, 1998 the company incurred two
noncash charges totaling $125 million. The first charge of $114.5 million is
comprised of a change in accounting estimates providing for a higher estimate
of the frequency of defaulted receivables, a lower recovery rate on
repossessed vehicles, a reduction in estimated voluntary prepayments, and
additions to general reserves. The second charge of $10.5 million relates to
the elimination of the retail marketing program by the end of 1998 and other
organizational changes to improve operational efficiencies.
The higher estimate of the frequency of defaulted receivables is
primarily derived from the results of an extensive analysis the company
performed on its loan portfolio to identify correlations between obligor and
contract characteristics of the loans when originally booked and ultimate
credit performance. The company has used the findings of this detailed
analysis as a basis for segregating its loan portfolio into credit tranches
and enhancing its risk management effort for new business. The lower recovery
assumption is in response to the Arcadia's decision to eliminate its practice
of selling repossessed vehicles on a retail basis and instead liquidate them
at auctions, which generally yield lower recovery rates.
The company announced annualized net losses of 4.92% for the six months
ended June 30, 1998 compared to 3.63% for the same period in 1997. Two-thirds
of the increase was due to the change in accounting estimates mentioned above,
with the remaining increase reflecting the higher proportion of classic loans
in the portfolio. Classic loans generally involve lower quality obligors than
those approved for premier loans. Approximately 71% of all loan purchases in
the first six months of 1998 were classic loans. This was an increase from 60%
in the last six months from 1997. Delinquencies (excluding unsold
repossessions) were 3.79% for June 30, 1998 compared to 3.63% at December 31,
1997 and 2.66% at June 30, 1997. The marginal growth of the serviced portfolio
to $5.1 billion at June 30, 1998 from $5 billion at March 31, 1998 is
consistent with the company's emphasis on more selective loan purchases.
The 1998-C receivables pool is composed of approximately $420 million in
retail installment sales contracts and $180 million (30% of total transaction
size) in the prefunding account that will be used to purchase receivables over
the next two months. The weighted average annual percentage rate will be
approximately 16.73%. The largest state concentration is Texas (18%), and the
weighted average original maturity and seasoning are 66 months and less than 1
month, respectively. New cars comprise nearly 16% of the initial receivables
pool and classic loans were limited to a maximum of 70% of the total pool.
Standard & Poor's expects the 1998-C pool to experience between 8% and
8.5% in cumulative net losses based on expected recovery rates in the 45% to
50% range. Annual excess spread and stressed cash flows provide adequate
liquidity and credit coverage for the standalone 'A-1'-plus rating on the 'A-
1' notes. The reserve account and excess spread captured in the reserve
account to a requisite level along with additional excess spread provides FSA
with a multiple of expected losses that is consistent with an investment grade
rating, Standard & Poor's said. - CreditWire
RATINGS ASSIGNED TO ARCADIA AUTOMOBILE RECEIVABLES TRUST 1998-C
Ratings
$66 million class A-1 5.470% notes A-1+
$194 million class A-2 5.377% notes AAA
$340 million class A-3 5.670% notes AAA