On the heels of Moody's Investors Service following suit last week and downgrading the corporate unsecured ratings of Ford Motor Co. and Ford Motor Credit, the auto ABS sector is primed and ready to receive the tidal wave of issuance expected from the beleaguered Big-Two as those companies are forced to turn away from the corporate debt markets for funding.
Moody's action on Ford came one week after both Ford and General Motors' corporate debt ratings were downgraded to junk status by Standard & Poor's, and the picture is not likely to get better any time soon. The two manufacturers are already finding unfavorable pricing in the corporate unsecured market, and sources are predicting the two could issue a combined $60 billion in various ABS asset classes by the end of the year. The good news is that the market seems to have the capacity to absorb that extra supply without seeing spreads widen prohibitively or scaring smaller issuers out of the market.
Spreads in the auto sector have widened up to six basis points across-the-board since late March, when GM restated its earnings guidance for the year with Ford following shortly afterward with its own earnings forecast revision. Sources say the spread widening may be a good thing for the market, as spreads had ground to unnaturally tight levels heading to that point.
Lehman Brothers researchers estimate that both Ford and GM ABS would widen up to 10 basis points for auto loan-backed transactions and 15 basis points for dealer floorplan ABS. GMAC-related home equity ABS, meanwhile, is seen cheapening just two to four basis points. Reports surfaced last week of Ford auto Owner Trust series 2005-B two-year A3 and three-year A4 trading at eight basis points over EDSF and 12 basis points over swaps, respectively.
"The price discovery in the secondary market offers positive signs for the auto sector," said Peter DiMartino, head of ABS and mortgage credit strategy at RBS Greenwich Capital. "Ford and GM will trade wider but investors need to feel as though they are getting paid for holding those names."
By Lehman's estimates, Ford Motor Credit Co. and General Motors Acceptance Corp. could require $20 billion to $25 billion each through the end of the year. "We believe the ABS market would be able to absorb this level of issuance, but spreads could widen up to an additional 25 basis points," wrote Lehman analysts in a report.
One auto ABS banker said the heavy tide of issuance by the major captives will not scare smaller issuers out of issuing competing deals, mostly because many of those issuers have few other funding options. "You can still bifurcate the market into captives and [independent] nonprime issuers," said the banker. "Investors will still see it as a different product." He said spreads on Ford and GMAC paper have a great deal of room to climb before investors in general start preferring wrapped nonprime issuers. "That is sort of a doomsday scenario," he said.
On a conference call held last week Bear Stearns analyst Dan Ilany, put GMAC's term financing needs in the $25 billion to $35 billion neighborhood for the year, noting that total includes other funding methods such as whole-loan sales. By contrast, Ilany forecast Ford Credit's term funding needs in the range of $16 billion to $25 billion.
Bear Stearns analysts noted that Ford and GM will also likely issue $20 billion to $30 billion in dealer floorplan ABS each, over the next 12 to 18 months.
Also on the call, analyst Gyan Sinha added his view that the market is broad enough to absorb the increased issuance. "The ABS market today is much, much bigger, much broader than it was, which bodes well for issues about access, liquidity," said Sinha. "Investors are more comfortable about the notion that these [trusts] can be considered separate entities," he added, emphasizing investors' realization that corporate ratings problems can be separated from ABS deal performance.
In fact, Despite the bleak financial outlook for the two companies, Fitch Ratings upgraded 14 subordinated classes from six Ford Credit Auto Owner Trust auto loan ABS transactions due to "increased available credit enhancement in excess of expected remaining losses." Of the 14 upgrades, 11 were to triple-A, one was to BBB+' from BB+,' another to AA' from BBB+' the third was to A+' from BBB+.'
The performance of the auto loan ABS in particular has been extremely positive, added RBS Greenwich's DiMartino. "Buying double- and single-A Ford auto ABS is like buying premature triple-As," he said.
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