Priya Jaiswal is a recognized authority in Banking, Business, and Finance, with extensive expertise in market analysis, portfolio management, and international business trends. This interview will cover the purpose and structure of the $3.5 billion credit-linked notes that Huntington National Bank is preparing to issue, the usage of the funds, and the key characteristics and associated risks of the loans in the reference portfolio.
Can you explain the purpose and structure of the $3.5 billion credit-linked notes that Huntington National Bank is preparing to issue?
Credit-linked notes are financial instruments that allow the issuer to transfer credit risk to investors. Huntington National Bank is choosing to issue $3.5 billion in these specific notes to reference a pool of auto loans extended to prime quality retail borrowers. This helps the bank manage and mitigate risks associated with its loan portfolio while offering investors exposure to the underlying auto loans.
What will the funds raised through these credit-linked notes be used for?
The funds raised through these credit-linked notes will be tied specifically to auto loans extended to prime quality retail borrowers. The reference portfolio associated with these notes includes a mix of loans with high credit quality and strong credit scores, providing a secure foundation for the investment.
According to Moody’s Ratings, the principal payments will be based on scheduled and unscheduled principal payments collected on the reference portfolio. How does this system work?
The principal payments system works by collecting both scheduled and unscheduled payments from the underlying auto loans in the reference portfolio. These collected payments are then used to pay principal to the investors holding the credit-linked notes. Interest payments, however, are managed separately and Huntington National Bank is responsible for making them directly, not deriving from the reference portfolio.
Moody’s mentioned that Huntington Bank has a long history in consumer auto finance. How does this history influence their current operations and decisions?
Huntington Bank’s long history in consumer auto finance, dating back to the 1950s, provides them with substantial experience and expertise in this sector. Their “originate to hold model,” where they keep loans on their balance sheet rather than selling them, is seen positively by Moody’s in terms of creditworthiness. This strategy demonstrates a commitment to maintaining high-quality loan portfolios.
What are some key characteristics of the loans in the reference portfolio?
The loans in the reference portfolio have several key characteristics: the average FICO score is 775 with a minimum of 660, 69% of the loans finance used cars, and they have a loan-to-value ratio of 90.2%. Additionally, the loans have seven months of seasoning on a weighted average basis, contributing to the overall credit quality of the portfolio.
Can you explain more about the pro-rata repayment structure and the associated credit risks identified by Moody’s?
The pro-rata repayment structure means that repayments are distributed proportionally among different tranches. While this provides a form of credit enhancement, it also poses certain risks. As the notes amortize, more senior bonds could be exposed to tail risk, which is the risk of loss due to late-stage defaults. To mitigate these risks, the tranches must maintain specific levels of credit enhancement before principal can be distributed to more junior notes.
Could you provide more details about the different tranches of notes issued in this deal?
The deal will issue notes through seven tranches: A, B, C, D, E, and R classes. Each tranche benefits from different levels of subordination which acts as a buffer for absorbing losses. For example, the A-R tranche enjoys a subordination level of 12.50%, while the B tranches benefit from 2.50%, C class has 2.05%, D class 1.20%, and R class 0.65%. Moody’s assigns respective credit ratings to each class, reflecting the associated risk levels.
J.P. Morgan Securities, BofA Securities, and Citigroup Global Markets are named as lead underwriters. What roles do these companies play in this deal?
As lead underwriters, J.P. Morgan Securities, BofA Securities, and Citigroup Global Markets play crucial roles in managing the issuance of these credit-linked notes. They are responsible for pricing the notes, distributing them to investors, and ensuring that the transaction is successful. Their involvement brings credibility and expertise to the deal.
What considerations or risks should investors be aware of when looking at these credit-linked notes?
Investors should consider the risks associated with the pro-rata repayment structure, which can potentially expose more senior bondholders to tail risks. They should also review the credit quality of the underlying loan portfolio, the levels of subordination, and the performance tests that payments to subordinate classes are subject to.
Lastly, how does this credit-linked note issuance align with Huntington National Bank’s broader financial strategy and goals going forward?
This issuance aligns with Huntington National Bank’s strategy of managing its loan portfolio risk while capitalizing on its strengths in consumer auto finance. By issuing credit-linked notes, Huntington is able to transfer credit risk away from its balance sheet, thus enhancing capital efficiency and supporting future growth objectives.
Do you have any advice for our readers?
My advice would be for readers to pay careful attention to the underlying credit quality and repayment structures when considering investments like credit-linked notes. It’s essential to understand the levels of credit enhancement and associated risks to make informed decisions.
