Item 2.03. Creation of a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
Securitization of Receivables
CPS, Subsidiary, the Trust and others on February
2, 2022, 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 March 19, 2022, (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
Computershare Trust Company, N.A. ("CTCNA"), 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 CTCNA as indenture
trustee for benefit of the holders of the Notes (as defined below), (v) the Trust issued and sold $316.8 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 CTCNA 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. On February 9, 2022, the intended sale of the Subsequent Receivables to the Trust
was effected.
Security for the repayment of the Notes consists
of the 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. CTCNA 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.
The Subsequent Receivables having been sold
to the Trust on February 9, 2022, the Trust holds 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
|
|
0.98%
|
|
$ 157,740,000
|
|
Class B
|
|
1.70%
|
|
$ 46,695,000
|
|
Class C
|
|
2.17%
|
|
$ 49,335,000
|
|
Class D
|
|
2.84%
|
|
$ 36,630,000
|
|
Class E
|
|
4.88%
|
|
$ 26,400,000
|
The 2022-A transaction has initial credit
enhancement consisting of a cash deposit equal to 1.00% of the original receivable pool balance and overcollateralization of 4.00%. The
final enhancement level requires accelerated payment of principal on the Notes to reach overcollateralization of the lesser of 8.40% of
the original receivable pool balance (Initial Receivables and Subsequent Receivables, taken together), or 25.80% 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 $330.0 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.
Warehouse Credit Facility
CPS first incurred indebtedness under the
revolving credit agreement in November 2015. CPS intends to incur indebtedness from time to time as it purchases motor vehicle receivables
from dealers. CPS does not undertake to provide updates regarding the amount of indebtedness outstanding from time to time, and no inference
should be drawn that such indebtedness has not changed.