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Auto ABS Drives Pipeline Volume

Auto ABS issuance is on track to beat 2010 volumes if the healthy January pipeline is an indicator of both supply and demand in the sector. Securities backed by auto loans and inventory add up to about $8 billion so far this year.

According to Moody's Investors Service report, issuance in 2011 in likely to increase to $65 billion, spread among loan, lease and floorplan transactions. In 2010, approximately $57.67 billion bonds were sold, according to data from Citigroup Global Markets.

The sector has benefited from tightened credit standards and the early ABS deals from issuers such a Ford Credit Co., Toyota Motor Credit Corp., Santander Consumer USA and Hyundai Motor Co., Ally Financial and AmeriCredit have been well received.

These tightened credit standards means that 2010 vintage deals are considered super prime. "The FICO score is much higher than corresponding deals and the higher credit quality means low expected losses," a market trader said. "Generally these auto deals have retail amortization structure that builds in credit enhancement, which further buffers the Class A."

One more factor that is propelling the good times in auto ABS is the strong used vehicle market, which the market trader said would impact the net loss in auto loan deal and the residual value in lease deals.

According to Moody's, the residual value that, at the time of ABS issuance, comprise roughly two-thirds of the expected stream of cash flows, have benefited from this "about-turn in the used-vehicle market since mid 2009. "

"Unlike older transactions where a bulk of the leased matured in 2008 and early 2009, current outstanding transactions are experiencing mid-to-high single digit gains on sales of off-lease vehicles," Moodys analysts said in the report. "The gains represent a reversal from recent years when residual values experienced unprecedented volatility due to the broader macroeconomic environment and the deteriorating financial residual value losses of 35% or higher at the 'Aaa(sf)' level, which is approximately two times the losses experienced by the sector between late 2008 and early 2009."

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