With the inaugural offering of CARSS 2004-1, Banc of America Securities did in autos what it successfully pioneered in the MBS market - a synthetic default recourse transaction to bifurcate and sell off the risk of a portfolio of consumer loans. As with BofA's Resi Finance LP program, which has issued seven securitizations totaling a nominal $105 billion, the $3.89 billion CARSS deal is structured to remove the credit risk of the collateral backing the single-A through single-B rated classes, retaining the high investment-grade risk.
Similarly to Resi, BofA is expected to bring similar synthetic auto transactions in the future, while other investment banks, with commercial banking entities, are not expected to follow suit.
CARSS is structured in a similar fashion to Resi, with the bulk of the notes retained by BofA. Of the $3.89 billion total, just $220 million hit the market, with $3.67 billion retained by BofA. Offered spreads for the deal - though they lack an apples-to-apples comparison - were described by investors as being tight, considering the difficulty "getting your hands around wraps and warrantees" imbedded in the structure.
In fact, traditional auto ABS investors did not drive this deal, sources said, as synthetic securitizations are purchased by the most sophisticated investors and tend to be sold to overseas accounts. "It's a synthetic so it doesn't fit a lot of my account guidelines" said another U.S. investor who did not participate in CARSS 2004-1. "And in terms of credit, we chose to avoid the large exposure to used vehicles," he added.
The collateral referenced by CARS 2004-1 was described as a mix of new and used auto loans to prime borrowers, that will continue to be serviced by Bank of America N.A. BofA will gain capital relief for the subordinated credits sold, rating agency sources added.
Citing the transactions private, Rule 144A status, sources within BofA declined to comment. It is unclear how frequently BofA will offer synthetic auto loan ABS in the future.
As of last Thursday, prior to pricing, indicative levels were inside most comparably rated auto ABS subs that have priced this year, although the tenor was shorter - with average lives inside of two years. CARSS single-A rated B1 class, with a 1.70-year average life, was marketing at 25 to 30 basis points over one-month Libor, with the 1.65-year triple-B B2 class talked in the 100 basis point area over Libor.
Non-investment grade classes were offered at 350, 550 and 800 basis points over Libor for split rated B3, B4 and B5 classes, respectively. In the most recent Resi finance transaction, single-B rated subs, with a 9.5-year average life, priced at 1570 basis points over Libor.
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