1/x: Since I had some fun with the $TSLA ABS thread, I absolutely cannot resist digging into the July 23, 2020 offering from everyone's favorite ABS bandits at $CACC. What kind ingenious financial engineering did they cook up this time? Let's have a look and find out! 
2/x: First, let's see what $CACC is working with in terms of collateral. They have a pool of 71k used car loans with an average FICO score of 546 and $835M in principal outstanding. Out of these loans, $194M are already delinquent, not a pretty sight!
3/x: Note that 66% of the portfolio is made up of dealer loans. Let's break down what that is using the handy explainer provided by Moody's. To sum it up briefly, a dealer loan is when $CACC agrees to pay about half of Joe Sixpack's 20%+ APR used car loan to the dealer upfront.
4/x: In exchange for the upfront payment, the dealer hands the servicing, first-priority interest, and lien over to $CACC. Once $CACC has finished extracting its share of repayment, they keep servicing the loan (and collecting fees) until Joe has repaid the dealers share as well.
5/x: Also note that in this case, the ABS is covering 80% of $CACC's upfront payment. This means that $CACC as servicer gets the money from Joe, pays themselves a servicing fee, pays the ABS for the 80%, pays themselves for the 20%, and then the dealer for the rest of the loan.
6/x: Finally, the 34% of the portfolio that is not dealer loans is just a regular portfolio of subprime car loans that $CACC owns outright with no remaining obligation to the dealer. Cool, now that we got that down, let's see what they're trying to do with all this:
7/x: $CACC is issuing $264M in AAA-rated notes (at 1.37% yield), $76M in AA-rated notes (at 1.93% yield), and $44M in A-rated notes (at 2.73% yield) backed by this subprime dumpster fire. How are they doing this? Let's start with the more basic tricks and work up to the fun part.
8/x: Okay, so the basic stuff going on here is 20% of overcollateralization and a 1.6% reserve fund. $CACC holds on to the most junior notes to absorb the first 20% of losses personally and keeps a 1.6% cash reserve to provide an extra buffer. Okay, now for the fancier stuff:
9/x: For the first two years, this deal is a revolving pool! This means that $CACC will use funds left after it takes its 6% servicing fee, pays the trustee, pays coupons, and replenishes the reserve account to ADD NEW CAR LOANS TO THE POOL TO REPLACE DEFAULTS!
10/x: Revolving pools are common in credit card and auto loan/lease ABS where defaults are expected to be significant (and have sometimes been used elsewhere as well). The clear advantage is that bad loans are replaced, but $CACC has a little twist in this one:
11/x: $CACC's ABS is unusual in the sense that it doesn't provide clear limits as to what the bad loans are replaced with! Moody's is concerned that the revolving process could stuff the pool with poorly-diversified low-quality loans, which would be a risk, not a benefit.
12/x: Of course, the sleaze-bags over at $CACC have a few more tricks up their sleeve to make this thing more palatable. Their next one: FULL-TURBO AMORTIZATION! After the 2 years of revolving are over, all funds left over after fees and coupons go to paying off principal ASAP.
13/x: This is good for the bondholders since they get paid quickly with no cash leaking out except the residual car loans remaining after full repayment (which go to $CACC as the holder of the unpaid 20% of most junior notes). Finally, let's get to the best part.
14/x: There are a number of triggers in the term sheet that would cause the ABS to go full-turbo before two years are up as extra protection to bondholders. Let's go through the ones I highlighted. First, if they touch the reserve account buffer, automatic full-turbo.
15/x: Secondly, if they suffer too many defaults or fail to add sufficient replacement loans to keep the overcollateralization buffer to 20%. They also go turbo if they collect less than 90% of their forecasted loan payments or keep more than 5% of the portfolio in cash.
16/x: The last one here though is the most interesting. The ABS goes turbo if the amount $CACC paid to dealers upfront exceeds 75% of the FORECASTED collection amount. Previously, this trigger clause was done differently:
17/x: In the past, this trigger was defined as a fraction of total principal and interest, now it's defined as a fraction of the FORECASTED proceeds. This seems like a minor difference, and Moody's says it's effectively equivalent. But $CACC's forecast is a black-box model!
18/x: Why would they make this change? Well, this is just speculation, but maybe it has to do with forecasts trending down and suffering down revisions lately. If collections aren't going too well, $CACC may want to assert some more control to avoid premature amortization:
19/x: This is because while premature amortization would probably make the bondholders whole (albeit without receiving the entirety of their planned coupons), it would greatly hurt $CACC's reputation in similar deals in the future, thus the effort to subvert this rule a bit.
20/x: Okay, let's summarize! There are a lot of bells and whistles in this deal. That is not unexpected. A sophisticated securitization structure is necessary to make subprime used car loans acceptable for typical fixed income investors.
21/x: What did surprise me were the two points regarding the lack of collateral restrictions during the revolving period (which Moody's also noted) and the change around the premature amortization trigger conditions (which Moody's kinda ignored as immaterial)
22/x: While the credit enhancements were definitely impressive (20% OC buffer, 25% subordinated notes, 1.6% reserve account for a total ~46.6% loss cushion on the AA-tranche), the subprime collateral and term-sheet details would make me a bit uneasy as an ABS investor.
23/x: Finally, I hope you enjoyed and learned something interesting about ABS if you made it this far! This was just meant as a look at the bonds issued July 23 and not $CACC as a whole. The bigger story is excellently covered by @PlainSite so give them a follow if you want more!
