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ABS East: Spreads between 1st, 2nd tier auto issuers 'collapsing'

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Auto loan securitization has been in overdrive this year, even if the global tussle over import tariffs is injecting a note of caution.

Despite a slight cool-down in sales of new vehicles, banks and captive finance companies are tapping the securitization market at a faster pace than last year. Amy Sze, executive director at JP Morgan Securities, expects issuance to reach $100 billion for 2018 as a whole, which would be up from $93 billion in 2017.

Investors’ appetite for auto asset-backeds remains strong because the economy is strong and unemployment low, and used-car values remain strong, she said. Another important factor in investors sentiment is the ongoing credit upgrades of outstanding asset-backeds as low default levels allow credit enhancement in deals to build up.

As a result, yield spreads on auto asset-backeds are narrowing, even for “lower-tier” issuers, Sze said during a panel at IMN’s ABS East Conference. The tiering normally seen between larger issuers with longer track records and smaller players with shorter track records has “collapsed,” she said. As a result, even lower-tiered issuers are enjoying cheaper funding.

One area of relative weakness has been resale values of used sedans, which have fallen out of favor with U.S. consumers. However, Steve Hetrick, Treasurer at Nissan Credit Acceptance Corp. and another panelist, said that values of sedans coming off-lease have started to recover after weakening earlier this year. (So-called “residual values” are important in lease securtization, since the proceeds from the resale of a vehicle form part of the collateral.)

Hetrick said Nissan remains committed to the sedan market, despite consumers’ preference for sport utility vehicles and crossover utility vehicles, which would depress sales.

Other panelist sounded a cautious note about the threat of higher tariffs on non-U.S. vehicles. Jamie Feehely, managing director of securitization at Canada’s National Bank Financial, said the tariffs being discussed don’t recognize the global nature of the auto market. He cited as an example the Toyota RAV4, which is manufactured in Ontario, using parts from Mexico (40%) and the U.S. (40%) as well as Canada (20%).

The result could be a “dearth” of new-car sales, Feehely said, adding, “I don’t know if there’s a [prime] securitization that’s been done with used cars.”

Stefan Glebke, president of BMW US Capital, acknowledged that the German auto manufacturer may have to produce sedans in the U.S. “We are trying to optimize as much as we can. Automotive industry is really a global industry, and we have suppliers everywhere in the world,” he said.

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