Item 2.03. Creation of a Direct
Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
CPS, Subsidiary, the Trust and others
on October 17, 2018, entered into a series of agreements that, among other things, created long-term obligations that are material
to CPS, Subsidiary and the Trust. Under these agreements (i) CPS sold the Initial Receivables to Subsidiary, and committed to sell
the Subsequent Receivables to Subsidiary not later than November 30, 2018, (ii) Subsidiary sold the Initial Receivables to the
Trust, and committed to sell the Subsequent Receivables to the Trust, (iii) the Trust deposited the Initial Receivables, and committed
to deposit the Subsequent Receivables, with Wells Fargo Bank, N.A. ("Wells Fargo"), as trustee of a grantor trust, receiving
in return a certificate of beneficial interest (“CBI”) representing beneficial ownership of the Receivables, (iv) the
Trust pledged the CBI to Wells Fargo as indenture trustee for benefit of the holders of the Notes (as defined below), (v) the Trust
issued and sold $245.0 million of asset-backed Notes, in five classes (such Notes collectively, the "Notes"), (vi) a
portion of the proceeds from the sale of the Notes was pledged to Wells Fargo as trustee for benefit of the holders of the Notes,
to be used to fund the purchase price of the Subsequent Receivables, and (vii) a cash deposit (the "Reserve Account")
in the amount of 1.00% of the aggregate balance of the Initial Receivables was pledged for the benefit of the holders of the Notes.
Security for the repayment of the Notes
consists of the Initial Receivables and, when and if sold, the Subsequent Receivables, and the rights to payments relating to the
Receivables. The Receivables were purchased by CPS from automobile dealers, and CPS will act as the servicer of the Receivables.
Credit enhancement for the Notes consists of over-collateralization and the Reserve Account. Wells Fargo will act as collateral
agent and trustee on behalf of the secured parties, and is the backup servicer.
The Notes are obligations only of the
Trust, and not of Subsidiary nor of CPS. Nevertheless, the Notes are properly treated as long-term debt obligations of CPS. The
sale and issuance of the Notes, treated as secured financings for accounting and tax purposes, are treated as sales for all other
purposes, including legal and bankruptcy purposes. None of the assets of the Trust or Subsidiary are available to pay other creditors
of CPS or its affiliates.
Upon completion of the anticipated
November 2018 sale of the Subsequent Receivables to the Trust, the Trust will hold a fixed pool of amortizing assets. The Trust
is obligated to pay principal and interest on the Notes on a monthly basis. Interest is payable at fixed rates on the outstanding
principal balance of each of the five classes of the Notes, and principal is payable by reference to the aggregate principal balance
of the Receivables (adjusted for chargeoffs and prepayments, among other things) and agreed required over-collateralization. The
following table sets forth the interest rates and initial principal amounts of the five classes of Notes:
Note Class
|
Interest Rate
|
Amount
|
Class A
|
3.06%
|
$112,333,000
|
Class B
|
3.61%
|
$35,525,000
|
Class C
|
3.83%
|
$31,850,000
|
Class D
|
4.34%
|
$27,807,000
|
Class E
|
5.82%
|
$26,215,000
|
The 2018-D transaction has initial
credit enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and over-collateralization
of 4.60%. The final enhancement level requires accelerated payment of principal on the Notes to reach overcollateralization of
the lesser of 8.50% of the original receivable pool balance (Initial Receivables and Subsequent Receivables, taken together), or
18.65% of the then outstanding pool balance, but in no event less than 2.50% of the original receivable pool balance.
If an event of default were to occur
under the agreements, the Trustee would have the right to accelerate the maturity of the Notes, in which event the cash proceeds
of the Receivables that otherwise would be released to Subsidiary would instead be directed entirely toward repayment of the Notes.
Events of default include such events as failure to make required payments on the Notes, breaches of warranties, representations
or covenants under any of the agreements or specified bankruptcy-related events. In addition, if the Receivables (pledged as security
for the Notes) were to experience net loss ratios that are higher than specified levels, the existence of such a "trigger
event" would also require that the cash proceeds of the Receivables that otherwise would be released to Subsidiary would instead
be directed to payment of principal on the Notes, until specified increased levels of overcollateralization were achieved.
At such time as the aggregate outstanding
principal balance of the Receivables is less than 10% of the intended initial aggregate balance of $245.0 million, CPS will have
the option to purchase the Trust estate at fair market value, provided that such purchase price is sufficient to cause the Notes
to be redeemed and paid in full, and to cause other obligations of the Trust to be met.