Auto loan asset-backeds are performing well, pricing tight and drawing more originators into the field.
This was the optimistic message delivered by a number of panelists at the ABS East conference. But there were undertones of concern as well, revolving mostly around the heady growth in subprime lending, and, to a lesser extent, compliance with Reg AB II.
Stuart Litwin, a partner at Mayer Brown, said that banks are encountering more incentives to securitize their auto loans. A handful of regulations makes it less economical for them to hold on to this collateral.
Anthony Sepci, a partner at KPMG, pointed out that banks with assets in the $10 billion-to-$50 billion range were looking into auto loans as a way to “supplement” weakness in mortgages. These originators, he said, are good candidates for securitization. This group includes Huntington, which issued a $1 billion deal in October 2012, and Fifth Third, which has issued at least two deals this year off its Fifth Third Auto Trust, while also selling loans that have ended up in at least one multi-seller mortgage securitization.
Pricing among auto loan asset-backeds has remained remarkably steady so far this year, said Roger Klepper, managing director at Credit Agricole. Comparing the first prime deal of the year — which came from Ford Motor Credit in January — and a similar transaction from American Honda Finance in August.
Klepper said the A1-A3 tranches of the two deals were within a few basis points of each other. The only slight difference was for the longer, three-year A4 tranches, with Honda’s coming in at 18 basis points over, a good nine basis points tighter than Ford’s comparable notes. Klepper said that was a reflection of a flattening of the interest rate curve in general since the beginning of the year.
Panelists said some uncertainty was being injected into auto loans by regulations, though no one seemed particularly troubled by them, especially compared to the reg-related concerns bedevilling other asset classes. Litwin said regulations could motivate issuers to continue issuing triple-A deals into the public market while diverting lower rated tranches into private placements.
Reg AB II raises a number of questions for auto loan players, which will have to provide around 67 data points under the rule. One lingering question is how late fees for securitized loans — which have traditionally gone to the servicer but not the ABS vehicles — would be approached by the new regs, Litwin said.
Participants also discussed the swift growth of subprime auto loans, with rated deals in this segment up 15% from last year in the first half, and a forecast of around $20 billion for all of 2014.
Fitch Ratings Director Autumn Mascio said that the agency was not overly concerned about the sector in general so much as fast-growing originators with an overreliance on securitization and a limited operating history.