With performance in the auto ABS market suffering from lack of available credit to consumers, decreasing used vehicle values, and the rising unemployment rate, it seems only natural that new deal flow would be sidelined.
But despite the downgrades and negative outlooks, subprime auto issuer AmeriCredit Corp. has been trading in the secondary market and closing new deals - when even prime auto ABS issuers have stepped back from the space. This situation, combined with a recent $306 million deal, Honda Auto Receivables Owner Trust 2008-2 (see page 8), and an upsized $600 million Nissan Motor Corp. deal that closed at the beginning of the month, has analysts noticing there is still relative interest in auto ABS despite the expected losses.
Late last month, AmeriCredit priced a $500 million auto loan securitization, AmeriCredit Automobile Receivables Trust 2008-2. The lead managers on the transaction were Deutsche Bank Securities, Wachovia Securities and Barclays Capital. The deal utilizes a senior-subordinate structure, and is the second AmeriCredit transaction in 2008 to do so. The company also completed a $500 million senior-subordinate securitization of subprime receivables in October.
Though neither of these deals was widely syndicated, according to sources - with the 2008-1 deal financed mainly by the lead managers on the transaction - there is still an interest in the AmeriCredit name, market sources agreed. In the 2008-2 transaction, AmeriCredit cut a deal to issue about 15.1 million of its common shares to Fairholme Funds in exchange for the 8.5% senior notes due 2015 that were held by Fairholme. As part of the deal, Fairholme agreed to buy roughly $123 million of notes rated below 'AAA' in AmeriCredit's ABS deal.
Still an Attraction
Indeed, AmeriCredit is a name that trades on a fairly regular basis in the secondary market, an industry source said. "It is a name that shows up on a lot of lists," the source said. "It is obviously a matter of price, but it shows that some of those deals are relatively well enhanced compared with what investors think the future losses will be."
Additionally, AmeriCredit was able to exercise a cleanup call on a 2004-C-A deal in October. This means the auto firm was in a sound enough liquidity position to pay the fees associated with the call in order to free up cash in these reserve accounts, the market source said. It also means that there is a fair amount of cash still tied up in the transaction that the company can use.
However, there has been some concern regarding the company's overall credit profile. Last week, Fitch Ratings cut the long-term Issuer Default Rating to 'B-' from 'B+', while keeping the company on Rating Watch Negative. Last month, Moody's Investors Service downgraded AmeriCredit's Corporate Family Rating and its senior unsecured debt rating to 'B2' from 'B1'. The ratings remain on review for possible further downgrade.
All in all, AmeriCredit faces the same bleak economic conditions plaguing the rest of the auto ABS market and consumer ABS across the board.
Defaults are currently at two to two-and-a-half times the lows seen in 2003 and 2004. And while losses currently remain within historical norms, "we will likely see higher than normal default rates and loss severities," said John McElravey, director in ABS research at Wachovia Capital Markets.
Underwriting has also tightened up, which may be a positive for deal performance, since with reduced demand for loans issuers can be more selective about who they lend to.
AmeriCredit has curbed its loan origination volumes to a current annual run-rate of about $1.2 billion from a peak of $8.5 billion in fiscal 2007, because of weakening economic conditions and deteriorating asset quality, according to Moody's.
While less demand on the consumer side should keep issuance down, on the other hand lenders need somewhere to place the loans that have been made already, McElravey said. "There is a lot of pent up supply that would like to come to the ABS market, but it hasn't come yet and that is because of the relatively high funding costs," he said. This leads to competing pressures. Less consumer demand and wide spreads are resulting in a reluctance to come to market, but there also continues to be a need to use ABS, he said.
Additionally, investors don't have much appetite for risk, especially with the pressures on year-end balance sheets. While there is some interest in deals that are performing well but priced very wide, in general the vast majority of traditional cash ABS investors don't have a lot of extra cash to devote to the sector right now, McElravey said.
Still, issuers endure for the time being. AmeriCredit holds a significant position - despite recent cutbacks - in the subprime auto market. The company also has a significant tangible equity base, efficient servicing systems, and infrastructure and proprietary credit scoring models for underwriting and pricing, as well as a capable senior management team, Moody's said.
"Their financial profile has changed but we haven't noticed any disruption in the servicing portfolios," said John Bella, managing director at Fitch Ratings. "If we thought performance was deteriorating because they were cutting corners, cutting staff, like fewer collectors for example, those would be issues that would concern us." At the current rating of 'B-', Bella said that Fitch doesn't anticipate that AmeriCredit will service its portfolio any differently.
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