KBRA has announced the assignment of preliminary ratings to six classes of notes to be issued by First Investors Auto Owner Trust 2026-1 (FIAOT 2026-1), a new asset-backed securitization (ABS) backed by a diversified pool of auto loans. This transaction marks an important milestone for Stellantis Financial Services, Inc. (SFS), as it represents the company’s first term ABS issuance in 2026 and its fifth such transaction since its acquisition by Stellantis N.V. in 2021.
The FIAOT 2026-1 issuance highlights the continued evolution of securitization strategies within the automotive finance sector, particularly as large OEM-backed finance companies increasingly leverage capital markets to optimize funding, diversify liquidity sources, and support loan origination growth. With a total issuance size of approximately $497.5 million, the transaction is structured to include six classes of notes, each benefiting from varying levels of credit enhancement tailored to their respective risk profiles.
Transaction Overview and Structure
The FIAOT 2026-1 securitization is collateralized by a pool of fixed-rate automobile retail installment contracts (RICs). These contracts are secured by both new and used vehicles and are extended to a mix of consumer and commercial borrowers. The underlying collateral reflects SFS’s lending focus on near-prime and prime borrowers, a segment that balances yield generation with relatively controlled credit risk.
The six classes of notes to be issued under this transaction are structured to provide a range of investment-grade opportunities, each supported by a robust credit enhancement framework. The Class A-1, A-2, and A-3 notes benefit from the highest level of initial credit enhancement at 36.35%, while the subordinated tranches, including the Class D notes, carry lower levels of enhancement, with the latter receiving approximately 14.00%.
Credit enhancement mechanisms play a central role in ensuring the stability and reliability of ABS transactions. In the case of FIAOT 2026-1, these mechanisms include subordination (for all classes except Class D), overcollateralization, a reserve account, and excess spread. Together, these elements provide multiple layers of protection against potential losses arising from borrower defaults, prepayments, or macroeconomic stress.
Subordination ensures that losses are absorbed first by lower-rated tranches before impacting senior noteholders. Overcollateralization refers to the practice of having a collateral pool whose value exceeds the outstanding balance of the issued notes, thereby providing an additional cushion. The reserve account offers liquidity support, particularly during periods of cash flow disruption, while excess spread—defined as the difference between the interest earned on the collateral and the interest paid to noteholders—serves as an ongoing source of loss absorption.
Role and Strategy of Stellantis Financial Services
As the originator and servicer of the underlying auto loans, Stellantis Financial Services, Inc. plays a pivotal role in the transaction. The company operates as the indirect finance arm of Stellantis N.V., one of the world’s leading automotive manufacturers. Through its network of approximately 2,500 franchised dealerships across the United States, SFS facilitates financing for a wide range of vehicle brands, including Chrysler, Jeep, Ram, Alfa Romeo, and Fiat.
SFS’s business model centers on purchasing retail installment contracts originated at the dealership level. This indirect lending approach allows the company to maintain strong relationships with dealers while capturing a steady pipeline of loan originations. In addition to its core near-prime and prime lending activities, SFS has historically engaged in subprime lending through non-Stellantis dealerships, as well as refinancing programs targeting existing auto loans.
Since its acquisition by Stellantis N.V., SFS has undergone strategic transformation aimed at aligning its operations more closely with the parent company’s global financial services objectives. This includes a greater emphasis on disciplined underwriting, portfolio diversification, and the use of securitization as a key funding tool.
Credit Rating Methodology and Analytical Approach
In assigning preliminary ratings to the FIAOT 2026-1 notes, KBRA applied its established methodologies for evaluating auto loan ABS transactions. Chief among these is the Auto Loan ABS Global Rating Methodology, which provides a comprehensive framework for assessing the credit quality of underlying collateral, transaction structure, and expected cash flows.
KBRA’s analysis also incorporated its Global Structured Finance Counterparty Methodology, which evaluates the financial strength and operational capabilities of key transaction participants, including the originator, servicer, and any counterparties providing financial support. Additionally, the ESG Global Rating Methodology was applied to identify and assess any environmental, social, or governance factors that could influence the credit profile of the transaction.
A critical component of KBRA’s evaluation process involved detailed analysis of the collateral pool data. This includes borrower credit characteristics, loan terms, vehicle types, geographic distribution, and historical performance metrics such as delinquency and loss rates. By modeling various stress scenarios, KBRA is able to estimate potential losses and determine whether the available credit enhancement is sufficient to support the assigned ratings.
Operational reviews of Stellantis Financial Services, Inc. were also conducted as part of the due diligence process. These reviews assess the company’s underwriting standards, servicing practices, risk management frameworks, and technological capabilities. Periodic due diligence calls with management provide additional insights into business strategy, portfolio performance, and market conditions.
Importance of Legal and Structural Integrity
Before the transaction reaches closing, KBRA will review operative agreements and legal opinions to ensure that the structure of the securitization is sound and enforceable. Legal considerations are particularly important in ABS transactions, as they govern the transfer of assets to the issuing trust, the rights of noteholders, and the mechanisms for handling defaults or disputes.
The integrity of the legal framework ensures that the collateral pool is effectively isolated from the originator’s balance sheet, thereby protecting investors in the event of insolvency. This “true sale” structure is a cornerstone of securitization and is essential for achieving favorable credit ratings.
Market Context and Strategic Significance
The issuance of FIAOT 2026-1 comes at a time when the auto finance market continues to evolve in response to shifting economic conditions, regulatory changes, and technological advancements. Rising interest rates, changing consumer preferences, and increasing vehicle prices have all contributed to a dynamic lending environment.
For Stellantis N.V. and its financial services arm, securitization provides a flexible and efficient means of accessing capital markets. By converting illiquid loan assets into tradable securities, the company can free up balance sheet capacity, reduce funding costs, and support continued growth in vehicle sales.
The transaction also reflects broader trends in the ABS market, where investors are seeking high-quality, yield-generating assets with strong structural protections. Auto loan ABS has historically been a resilient asset class, benefiting from relatively short loan tenors, diversified borrower bases, and the essential nature of personal transportation.
Transparency and Investor Disclosure
KBRA has emphasized the importance of transparency and comprehensive disclosure in its rating process. Investors are provided with detailed information on key credit considerations, sensitivity analyses, and potential rating drivers. These insights help market participants understand the factors that could lead to upgrades or downgrades over time.
Sensitivity analyses, for example, examine how changes in macroeconomic conditions—such as unemployment rates or interest rate fluctuations—could impact loan performance and, by extension, the credit quality of the notes. ESG considerations are also highlighted where relevant, reflecting the growing importance of sustainability and governance factors in investment decision-making.
In addition to the rating report, KBRA provides access to information disclosure forms that outline the methodologies used, data sources, and key assumptions underlying the ratings. These documents serve as a valuable resource for investors seeking to conduct their own due diligence.
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