Dominion Bond Rating Service is touting its newly released rating methodology for auto ABS in the U.S. as a progressive approach, potentially accommodating single-B rated auto issuance.
"The auto market has not seen as much in the way of double-B and single-B tranches as some other asset classes have," said Chris O'Connell, vice president at DBRS. "We don't think we'll see much in those classes anytime soon, but we wanted to develop a framework for approaching those classes." To that end, the Canadian-based rating agency, which entered the U.S. market last fall, included recovery levels and stress levels appropriate to bonds on the lower end of the rating spectrum for auto ABS.
Moody's Investors Service Analyst Kumar Kanthan said that Moody's would not have a problem rating a bond at that level in the auto sector. Rather, they simply haven't been asked to do it much. "There is no particular issue with rating a B1," Kanthan said. "It's more a question of being able to market that security. The reason there is not much of a market for rating is because there isn't much of a market to buy."
While the auto sector has yet to witness a single-B rated auto tranche, and double-B rated tranches are rare, there could be opportunities for some issuers to travel further down in credit. "Issuers who are more concerned with the advance rate as opposed to the weighted average cost of capital, might have a more efficient structure if they were to issue further down the rating scale," O'Connell said.
Despite the scarcity of supply, a senior auto banker maintained that the demand for this paper is there as long as the price is right. "The only reason an investment-grade issuer might consider this is if they are trying to make a risk transfer argument to the rating agencies to obtain capital relief," he said, adding that the rating agencies would likely get stuck on "moral recourse" issues.
Speculative-grade issuers could probably get a single-B rated transaction done, but it would cost them, the banker said. "A [non-investment grade issuer] might consider it if they had no access to the high yield market or their high yield spreads were wider than ABS spreads. However, it depends on the issuer," he said. "Someone like [Americredit Corp.] could probably get it done."
Jennifer Kuritz, corporate funding manager at Nissan Motor Credit, said a single-B class would not be worth the expense. "As we account for everything on balance sheet, we view everything from a cost-of-funds point of view," Kuritz said. "Anything below our rating doesn't cost out."
The buyside contingent appears skeptical. "It doesn't seem very attractive for investment- grade issuers to sell single-B rated tranches on any consistent basis," an investor said. "There are a few double-B tranches out there - WALT deals - but these are more one-off deals."
DBRS has yet to rate an auto transaction in the U.S., but O'Connell said he is in discussions with several issuers. - KD/SM
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