Automobile ABS put the pedal to the metal early this year as the sector saw one of its biggest starts in recent history. In the first two weeks of the year, nearly $11 billion was issued and 2005 is widely expected to outpace 2004, though by how much is anyone's guess. One thing is for sure, it will take a monster truck-sized calendar to satisfy investor demand and loosen the historically tight spreads, and that is not expected to happen any time soon.
One ABS banker in New York said domestic captive auto manufacturers hungry for financing will be the bedrock of a strong auto ABS issuance calendar this year.
In the first week of the year, three auto manufacturers hit the board to constitute the biggest opening drive for auto issuance in recent history. Ford Motor Credit issued $4.5 billion of securities, DaimlerChrysler N.A. Holdings tapped the market with a $2 billion deal and Nissan Motor Credit priced $1.5 billion. Then, last week, American Honda Finance tapped the market with a $1.3 billion transaction through its Honda Auto Receivables Owner Trust, all four tranches of which priced through benchmarks. Sources say it is rare for an entire transaction to price at or through benchmarks, and possibly the first time it has ever happened with an auto deal.
"New-issue pricing spreads on the recent prime auto ABS have signaled a re-pricing of the broader auto ABS market," said Jay Kim, lead auto ABS banker with Barclays Capital. "Recent secondary trading activity of non-prime and subordinate auto ABS indicate spread tightening in these areas of auto ABS. In addition, the historical spread relationships between prime auto ABS and non-prime auto ABS as well as between senior and subordinate auto ABS continue to be challenged in the current markets as we experience continued compression in these relationships," said Kim. Barclays and Deutsche Bank Securities were joint-lead managers on the Honda deal.
The banker and others say lenders have a significant amount of unsecured debt coming due in 2005 and refinancing with unsecured debt will present an overly expensive option. As a result, those captives may opt to refinance with asset-backed securities and capitalize on the negative arbitrage between corporate debt and ABS.
The banker added that foreign captives will hit the ABS market as they gun for an ever-bigger share of the domestic auto market. "Companies such as Honda and Nissan may need to securitize more in 2005 in order to fund their growing balance sheets," he said.
Amy Martin, analyst with Standard & Poor's, said some independent finance companies, such as AmeriCredit Corp., scaled back origination volumes in 2003 and 2004 in order to focus on originating higher credit-quality loans. Martin says those companies may seek to increase originations this year, providing them with more auto loan contracts to securitize. S&P expects total auto ABS issuance to increase by 5% to 10% in 2005 from $74
billion last year. At the pace set in the first two weeks of the year, that seems almost guaranteed.
"Auto ABS dealer inventory is down as well," according to another ABS banker. In times of high investor demand, like now, dealer inventory is sometimes used to offset the pressure on the primary market by allowing investors to purchase securities in the secondary market. Since dealer inventories are drying up, investors are ravenously attacking whatever the primary market has to offer, allowing issuers to bring deals, such as the Honda deal, with sub-benchmark pricing. "If any investor needs short, fixed-rate paper, dealers can't even offer that to them," said the banker. "There is going to be a balancing point where supply does reach the limits of demand, but I don't see that point anywhere soon," he added.
Late last week, WFS Financial, the Santa Ana, Calif.-based non-prime auto lender, priced a $1.6
billion deal via Credit Suisse First Boston and Deutsche Bank as joint-lead managers.
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