BOCA RATON, FLA. - A crack team of leading ABS research analysts gathered last week at Information Management Network's ABS East conference to discuss the picture in the auto, credit card and student loan sectors. Consistent with the themes that ran throughout the conference, interest rates, employment, fuel prices and home price appreciation were seen as the key drivers of ABS performance.
The panel turned first to the world of auto ABS, where Ford Motor Co. and General Motors Corp. remain the center of attention. As those companies have slid into junk status over the past six months, they are widely expected to issue more ABS and tap less frequently from the unsecured debt markets. David Covey, vice president with Lehman Brothers, noted that in order to keep sales volumes high, there is the potential for Ford and GM, along with other captive auto finance companies, to ease their underwriting standards and offer more extended-term loans.
Covey pointed out that the share of 72-month loans in the market is up 22% since 2003, and that those loans have 30% to 35% greater cumulative losses than shorter-term loans. Covey noted, however, that the fear that Ford and GM would flood the market with auto paper after being downgraded below investment grade territory is over.
In response to the suggestion that the auto industry may be out of the woods after a shaky Spring, Deutsche Bank Securities Managing Director Anthony Thompson said "I think you can never say the worst is over for the U.S. auto sector." Thompson added that it is important to look at how the auto manufacturers deal with their pension liabilities.
As the panel turned its attention to the credit card sector, the sector was described as "one of the biggest casualties of the housing boom," as borrowers have used home equity to pay off short-term debt. Consolidation and M&A activity have also sucked so much potential volume from the sector that several panelists speculated whether analysts would even be talking about credit card ABS in two to three years.
In terms of student loan ABS, the panel focused on the pending re-authorization of the Higher Education Act and determined that the biggest risks revolve around prepayments. "With re-authorization, changing [loan] terms will be key," said Ryan Asato, vice president in JPMorgan Securities' research group. Asato advised drilling into newer deals to uncover what percentage of students has not yet been able to consolidate.
In terms of relative value, Deutsche Bank's Thompson said "anything that CDOs buy will outperform mezzanine and subordinate tranches," and that the fourth quarter for ABS would see more volatility than less. Mary Kane, director in ABS research at Citigroup Global Markets, recommends subordinate student loan paper, especially in the secondary market. She added that dealer floorplan ABS presented value, if only because there had been so few deals recently, and retail auto subordinates were appealing as well
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