Investors are migrating from retail auto loan securitization to deals backed by leases and dealer inventory financing, making it cheaper to fund these other kinds of lending via securitization.
GM Financial is taking advantage of this spread compression to expanding its securitization platform beyond subprime auto loans to deals backed by fleet leases and dealer financing, according to Susan Sheffield, executive vice president, corporate finance.
The finance arm of General Motors did five subprime auto loan deals in 2013 and will likely do another four to five in 2014, said Sheffield, who was speaking at an auto ABS panel this afternoon. The lender also plans one or two securitizations of auto leases this year and a couple of more in 2015. Unlike auto loans, the leases GM Financial makes are primarily to prime borrowers (70%), with the balance (30%) to “less than prime” borrowers, she noted.
GM Financial is also looking to expand the financing it provides to GM dealerships and plans to fund some of this lending via the securitization market as well. These dealer lines of credit are currently a much smaller business for GM Financial; Sheffield said the company provides about 5% of financing for its dealers, but it would like to increase its penetration of this market to 20%.
GM Financial is planning to offer prime auto loans by the middle of this year, though it probably wouldn’t securitize any of these loans before 2015.
While GM is expanding the types of lending it does, the company is holding the line on the credit quality of borrowers. The last time it expanded its risk appetite was in 2011, when “we got back to 2005-type vintage performance.” That means a target for cumulative net losses of 10% to 12% over the life of the loan.
Ford Motor Co., by comparison, is relying less heavily on securitization than in the recent past. In 2009, when it still had a below investment grade rating, Ford funded 55% of lending via securitization. It expects that to fall to about 44% this year and is targeting 35% by the middle of this decade, Dave Dickenson, associate director for asset management, said at the same panel.
Still, Dickenson said, Ford’s securitization platforms continue to be an important part of funding. The company priced a $1.5 billion prime auto loan deal today at weighted average cost of 20 basis points, he said.
Dickenson declined to provide a specific projection for issuance this year but said it would likely be in line with recent years, with several retail auto loan securitizations and a couple of deals backed by leases and dealer floorplans.
With funding cheap and performance strong, there hasn’t been much incentive to create new deal structures, although both Ford and GM issued deals last year with an unhedged, floating-rate tranche, in GM’s case on the money market tranche of a subprime auto loan securitization.
“We were not getting any interest in that bond so we thought if we offered part of it with floating rates it might entice other investors, and it helped,” Sheffield said.
She noted that GM Financial did not have to offer any additional credit enhancement because the deal already benefitted from a lot of excess spread.
“If that’s what investors would like to see, we’ll do it again, but if don’t need to we may not,” she said.
Ford also offered a short-dated, floating-rate tranche on a lease securitization in October 2013, “for a similar reason,” Dickenson said. “Particularly given concerns about [the end of] quantitative easing, investors are looking for floating-rate paper,” he said.
