Las Vegas - Auto lease ABS professionals highlighted several industry trends for the year ahead at the ASF 2007 conference held here last week, including weakened demand for new cars and higher program concentration limits for foreign vehicles. High on the list, however, was the use of floorplan assets in multiseller extendible note (EN)ABCP programs.
For the floorplan sub sector, the practice represents another funding source, but in the broader context of asset-backed finance, the shift reflects intensified competition between commercial banks for commercial paper business. Specifically, commercial banks are trying to find ways to compete with the growing use of single-seller EN programs, which, in the face of increasing liquidity costs, are becoming more attractive to commercial banks and to non-traditional ABCP sponsors. In particular, a growing number of investment managers and hedge fund managers are finding that they can set up EN programs without expensive bank liquidity lines, if high cashflow assets secure the programs. Among other uses, those programs could represent profitable ways to warehouse assets, whereby investment and hedge fund managers can eventually set up CDOs, industry sources said.
While commercial banks are striking back at increased competition from single-seller EN programs, it is still unclear whether the move will result in tangible cost benefits to potential clients - at least right now, industry sources said. Once Basel II is finalized, market participants said, then it might be implemented in a way that would allow commercial banks to provide cheaper liquidity facilities to their clients.
As for those floorplan auto lease assets, they should continue to be attractive assets for multiseller ABCP programs, industry sources said, because they generate a lot of cashflow. Barclays Bank's Stratford Receivables Co. is one example of a conduit that is tapping into that growing trend. Launched in 2004, the multiseller program is authorized to issue up to $10 billion of ABCP, and currently has about $7.8 billion outstanding by the end of last June, when information was last reported to the Moody's Investors Service ABCP Program Index.
Other important auto lease ABS developments include:
* Manufacturers are easing up on offering sales incentives to consumers, which is good news, said Matthew Traylen, from the Automotive Lease Guide, which provides residual value information. On the other hand, consumer demand for new cars continues to weaken, and will get no help from the forecast for real wages, which is similarly weak.
* New issuers should tap the ABS market in 2007.
After Ford Motor Co. and General Motors had a tempestuous 2006, panelists delineated specific impacts for the auto lease market. Non-program maximum limits should increase in 2007; an increase in concentration limits from foreign manufacturers; bankrupt original equipment manufacturers (OEMs) might buy non-program vehicles in greater numbers, possibly resulting in holdings of as high as 50%, up from the current 25% to 30% range. Also, rating agencies and monoline insurers are expected to separate structures from the credit quality of OEMs.
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