Flagship Credit Auto Trust 2019-3 - S&P Global

Presale:

Flagship Credit Auto Trust 2019-3

August 7, 2019

Preliminary Ratings

Class A B C D E

Preliminary rating AAA (sf) AA (sf) A (sf) BBB (sf) BB- (sf)

Type Senior Subordinate Subordinate Subordinate Subordinate

Preliminary amount (mil. Legal final maturity

Interest rate(i)

$) date

Fixed

215.41 Feb. 15, 2024

Fixed

29.45 Aug. 15, 2024

Fixed

38.71 Oct. 15 2025

Fixed

31.30 Dec. 15, 2025

Fixed

19.19 Dec. 15, 2026

Note: This presale report is based on information as of Aug. 7, 2019. The ratings shown are preliminary. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. (i)The actual coupons of these tranches will be determined on the pricing date.

PRIMARY CREDIT ANALYST

Timothy J Moran, CFA, FRM New York (1) 212-438-2440 timothy.moran @

SECONDARY CONTACT

Linda Yeh New York (1) 212-438-2520 linda.yeh @

Profile

Expected closing date

Aug. 22, 2019.

Collateral

Subprime auto loan receivables.

Originator

Flagship Credit Acceptance LLC and CarFinance Capital LLC.

Seller, sponsor, and performance guarantor FC Funding LLC.

Depositor

FCA Asset Securities LLC.

Servicer

Flagship Credit Acceptance LLC.

Issuer

Flagship Credit Auto Trust 2019-3.

Indenture trustee and backup servicer

Wells Fargo Bank N.A. (A+/Stable/A-1).

Underlying trust

Flagship Credit Auto Grantor Trust 2019-3.

Owner trustee and underlying trustee

Wilmington Trust N.A. (A/Stable/A-1).

Custodian

Deutsche Bank National Trust Co. (BBB+/Stable/A-2).

Lead underwriter

Wells Fargo Securities LLC.



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Presale: Flagship Credit Auto Trust 2019-3

Credit Enhancement Summary

FCAT FCAT FCAT FCAT FCAT FCAT FCAT FCAT FCAT FCAT 2019-3 2019-2 2019-1 2018-4 2018-3 2018-2 2018-1 2017-4 2017-3 2017-2

Subordination (% of the initial collateral balance)

Class A

35.25 35.25 35.55 35.55 37.75 37.75 37.76 36.50 40.50 40.50

Class B

26.50 26.50 27.05 27.05 27.25 27.25 26.76 26.25 26.25 26.25

Class C

15.00 15.00 15.80 15.80 15.00 15.00 14.76 14.75 14.75 14.75

Class D

5.70

5.75

6.70

6.70

5.75

5.75

5.76

5.50

5.50

5.50

Class E

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Overcollateralization

Initial (% of the initial collateral balance)

0.75

0.85

0.85

0.85

1.25

1.25

2.25

3.50

3.50

3.50

Target (% of the current collateral balance)

6.25

6.50

7.00

7.00

6.00

6.00

7.00

8.25

8.25

8.25

Floor (% of the initial and prefunded collateral balance)

1.00

1.00

1.00

1.00

0.50

0.50

0.50

0.50

0.50

0.50

Reserve fund

Initial (% of the initial and expected prefunded collateral balance)

1.00

1.00

1.00

1.00

2.00

2.00

2.00

2.00

2.00

2.00

Target (% of the initial and expected prefunded collateral balance)

1.00

1.00

1.00

1.00

2.00

2.00

2.00

2.00

2.00

2.00

Floor (% of the initial and prefunded collateral balance)

1.00

1.00

1.00

1.00

2.00

2.00

2.00

2.00

2.00

2.00

Total initial hard credit enhancement (% of the initial collateral balance)

Class A

37.00 37.10 37.40 37.40 41.00 41.00 42.01 42.00 46.00 46.00

Class B

28.25 28.35 28.90 28.90 30.50 30.50 31.01 31.75 31.75 31.75

Class C

16.75 16.85 17.65 17.65 18.25 18.25 19.01 20.25 20.25 20.25

Class D

7.45

7.60

8.55

8.55

9.00

9.00 10.00 11.00 11.00 11.00

Class E

1.75

1.85

1.85

1.85

3.25

3.25

4.25

5.50

5.50

5.50

Excess spread per

10.53

9.99 10.08

9.48

9.45

9.77

9.69

9.30

9.02

9.76

year (estimated %)(i)

(i)Includes the servicing fee of 2.50% and indenture trustee and backup servicing fees of 0.03%. FCAT--Flagship Credit Auto Trust. N/A--Not applicable.



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Presale: Flagship Credit Auto Trust 2019-3

Rationale

The preliminary ratings assigned to Flagship Credit Auto Trust 2019-3's (FCAT 2019-2) $334.06 million automobile receivables-backed notes reflect our view of:

- The availability of approximately 44.9%, 39.0%, 30.6%, 24.0%, and 19.4% credit support (including excess spread) for the class A, B, C, D, and E notes, respectively, based on stressed cash flow scenarios. These credit support levels provide coverage of approximately 3.50x, 3.00x, 2.30x, 1.75x, and 1.40x our 12.25%-12.75% expected cumulative net loss (CNL) range for the class A, B, C, D, and E notes, respectively (see the Cash Flow Modeling section for details). These break-even scenarios cover total cumulative gross defaults (using a recovery assumption of 40%) of approximately 75%, 65%, 51%, 40%, and 32%, respectively.

- The timely interest and principal payments made under stressed cash flow modeling scenarios that are appropriate to the assigned ratings.

- The expectation that under a moderate ('BBB') stress scenario, all else being equal, our ratings on the class A and B notes would not be lowered by more than one rating category from our preliminary 'AAA (sf)' and 'AA (sf)' ratings, respectively, throughout the transaction's life. Similarly, we expect that our ratings on the class C and D notes would not be lowered more than two rating categories from our preliminary 'A (sf)' and 'BBB (sf)' ratings, respectively. The rating on the class E notes would remain within two rating categories of our preliminary 'BB- (sf)' rating within the first year, but the class would eventually default under the 'BBB' stress scenario after receiving 50%-60% of its principal. The above rating movements are within the one-category rating tolerance for 'AAA' and 'AA' rated securities during the first year and three-category tolerance over three years; a two-category rating tolerance for 'A', 'BBB', and 'BB' rated securities during the first year; and a three-category tolerance for 'A' and 'BBB' rated securities over three years. 'BB' rated securities may default under a 'BBB' stress scenario. These parameters are in accordance with "Methodology: Credit Stability Criteria," May 3, 2010.

- The credit enhancement in the form of subordination, overcollateralization, a reserve account, and excess spread (see the Credit Enhancement Summary table above for details).

- The characteristics of the collateral pool being securitized.

- The transaction's payment and legal structures.

Changes From FCAT 2019-2 And Prior Pools

This is the company's 28th transaction in six years (the 23rd under the Flagship name, in addition to five under the CarFinance Capital Auto Trust [CFCAT] name, of which all but one were rated by S&P Global Ratings). The pool information is based on the initial pool as of July 31, 2019. It is expected that the closing-date pool, inclusive of the prefunded amount, will not be materially different from the statistical pool.

The clean-up call option for the series 2019-3 pool is the same as 2019-1 and 2019-2, at 5%; however, it is down from 10% on all of the prior deals, which we view as a potential negative.

The credit enhancement and collateral composition changes in the FCAT 2019-3 statistical pool, as of July 31, 2019, from the final series 2019-2 collateral pool, inclusive of prefunding, include the following.



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Presale: Flagship Credit Auto Trust 2019-3

Credit enhancement

- The class A, B, C, and D initial hard credit enhancement decreased to 37.00%, 28.25%, 16.75%, and 7.45%, from 37.10%, 28.35%, 17.85%, and 7.60%, respectively.

- Initial overcollateralization decreased to 0.75% from 0.85%, while the target decreased to 6.25% from 6.50%. The floor was unchanged at 1.00%.

Collateral composition

The collateral composition changes in the FCAT 2019-3 pool, as of July 31, 2019, from the FCAT 2019-2 final pool inclusive of prefunding, include:

- The weighted average LTV increased to 122.51% from 120.18%.

- Direct loans increased to 20.19% from 16.35%.

- For indirect loans, the percentage of Group A loans decreased to 14.88% from 15.74%. Loans in the top three origination programs (Group A, B, and C) decreased to 78.22% from 78.83% of the total pool.

- The percentage of loans with original terms greater than 60 months decreased to 84.13% from 86.45%; loans with original terms of 73-78 months increased to 0.66% from 0.41%.

- The weighted average DTI decreased to 32.37% from 33.64%

- The average original loan size increased to $21,081 from $20,529.

In our view, the collateral mix in this pool is similar to that of series 2019-2. We believe that the overall pool characteristics, like the program mix, continue to be stronger than pools securitized in 2016 and 2015, and, similar to recent securitizations, the pool includes no military loans and a declining proportion of thin files. Also, early performance on the 2017 and 2018 vintages shows noticeable improvement over the 2016 vintages. Therefore, our expected CNL range for the 2019-3 transaction is 12.25%-12.75%, unchanged from 2019-2.

Key Rating Considerations

We considered the following key strengths in rating this transaction:

- Flagship Credit Acceptance LLC is led by a seasoned management team with many years of experience in consumer finance, particularly subprime auto lending (see the Flagship Credit Acceptance LLC section for additional information).

- The company has completed 28 securitizations (23 under the Flagship name and five under CFCAT). FCAT 2012-1, 2013-1, 2013-2, 2014-1, and 2014-2 paid off with 10.26%, 10.47%, 11.12%, 11.26%, and 11.82% CNLs, respectively. In addition, four of the five legacy CFCAT deals have paid off: CFCAT 2013-1 (which we did not rate), 2013-2, 2014-1, and 2014-2, with 11.16%, 11.73%, 13.07%, and 14.04% CNLs, respectively. The outstanding CFCAT 2015-1 is currently at an 11.08% pool factor with 14.73% CNLs.

- The company's 2017 and 2018 securitizations are showing marked improvement in loss performance over the 2016 securitizations.

- The company has integrated two business platforms (see the Flagship Credit Acceptance LLC



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Presale: Flagship Credit Auto Trust 2019-3

section) without servicing disruptions and while maintaining generally consistent performance on the FCAT indirect portfolio.

- The company has a centralized underwriting and collection process and, according to management, it is their policy to verify income and employment on every funded contract.

- Approximately 15%-20% of monthly auto loan origination volume is direct to consumers. Direct lending is marketed through different channels, including an online search function, website aggregators, and pass-through programs with banks. Historical data show that direct loans have performed better than indirect loans.

- Flagship continues to improve its liquidity funding position by closing facilities with longer terms, higher proceeds, and lower borrowing cost.

- Flagship maintains a $900 million warehouse credit facility provided by five syndicated banks, with a two-year term, which matures in October 2020.

- Wells Fargo Bank N.A. will act as the indenture trustee and backup servicer. It has already data-mapped the company's servicing systems and will receive monthly data tapes and confirm certain data on the monthly servicer reports during the transaction's life. Flagship uses a Shaw servicing platform, which is an industry standard. Deutsche Bank National Trust Co. (DBNTC) is the custodian for all loans in this transaction. DBNTC holds the original physical contracts for tangible chattel paper and controls the electronic chattel paper (e-contracts).

In addition to the strengths outlined above, we considered the following concerns:

- Subprime auto finance companies in Flagship's segment of the market face an increasingly competitive environment as banks, captives, and credit unions vie for market share and can price loans more aggressively. This will continue to put pressure on independent companies' profit margins and will make it more difficult for them to maintain their return-on-asset margins.

- The company's loan loss provision increased in 2015 following the FC HoldCo LLC and CF Capital Holdings merger, which resulted in a net loss. In 2016, the company again increased its loss provisions and posted a net loss of $27.3 million for full-year 2016. However, it decreased the loss provision in 2017 and, while it posted a loss of approximately $35.0 million for full-year 2017, its audited Dec. 31, 2018, results show a return to profitability of $9.5 million. Unaudited results for the three months ended March 31, 2019 indicate net income of approximately $6.66 million.

- The company's ability to grow was affected by its lack of profitability since 2015, and it responded by prudently reducing origination volume and focusing on better-quality credits. The return to profitability, albeit modest, is a positive.

Transaction Overview

The originators, Flagship Credit Acceptance LLC (FCA) and CarFinance Capital LLC (CFC), as part of the forward-flow purchase agreement with FC Funding LLC (the sponsor and seller), will sell the initial automobile loan contracts in the FCAT 2019-3 pool to FC Funding LLC (see chart 1). During the prefunding period and after the closing date, FCA will originate and sell approximately $67.3 million in additional auto loan receivables to FC Funding LLC for subsequent inclusion into the FCAT 2019-3 collateral pool. FCA will service the loans and is obligated to continue to do so per the transaction documents. Contracts purchased by FC Funding LLC from FCA and CFC are without recourse. At closing, FC Funding LLC will sell the auto loans to the depositor, FCA Asset Securities



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