Could the online auction of Ford Motor Credit Co.'s corporate debt offering last week be the proverbial tip of the cyber iceberg?
Indeed it could, said Jim Bosscher, Ford Credit's assistant treasurer. In fact, the technological feat first unveiled last week by the issuer could be the framework by which the Big Three auto maker issues asset-backed securities.
"We would absolutely consider it," Bosscher said. "We definitely want to incorporate this capability into the issuance of all of our securities, whenever it's practical."
"This transaction is part of our overall Internet strategy as it pertains to investors and the capital markets," said David Prystash, Ford Credit's vice president and treasurer. "The idea was to use this transaction as a test vehicle for the technology, and our plan is to use it as quickly and as extensively as we can in all of our transactions going forward."
"That includes securitization," he added.
Lehman Brothers, with Fidelity Capital Markets as co-manager, led the $1 billion corporate debt offering. And beyond the achievement of being offered online, Ford's three-year notes also were available to retail investors.
So is this type of technology ripe for the asset-backed market?
"Absolutely," said Bill Ahern, a spokesman for Lehman Brothers. "It's hard to say when, but certainly things move faster when the Internet's attached to it than when it isn't. Just in the last week, the number of Internet related fixed-income offerings went from zero to three pretty quickly. So experience tells you that things will move fairly quickly throughout the industry."
The World Bank announced an Internet-related fixed-income offering last week, also being managed by Lehman Brothers. Additionally Fannie Mae sold $10 billion in notes with orders placed over Internet. Morgan Stanley Dean Witter managed that transaction.
Though asset-backeds have yet to be offered online, barely a day goes by without three or more banks announcing new developments in online origination.
"I can tell you we are working on a number of [Internet] transactions which I think would happen this year, but some of them are in the pretty early stages," said Brian Clark of Prudential Securities, the underwriter that brought to market PeopleFirst. The PeopleFirst transaction was the first term securitization backed by auto loans originated 100% online.
Clark sees additional asset classes using Internet origination down the line.
"Now that they've seen it in happen in PeopleFirst, people know that there's a viable alternative to traditional origination," Clark said. "There are a number of people who are just talking about it, and eventually they'll get there, but there are a number of people who are moving forward. And we're in the process of doing what I'll call pre-securitization work right now."
Eric Murphy, of First Union Capital Markets, said that one thing people will start to notice is that the pools will be mixed, in terms of how the loans were originated. Murphy worked on the NextCard conduits, which were backed by credit card loans originated over the Internet.
"With NextCard and the PeopleFirst transactions, you know that 100% of their origination was done online, so it's very easy to tell kind of how that marketing channel works," he said. "And then with some of the other issuers we'll see, it'll be a combination of Internet and traditional channels, so it's a little bit more difficult to tell."
At the end of the day, the assets are more or less the same, Clark said.
"The issues are ones of peculiarities related to the origination of the receivables over the Internet which can be addressed structurally and legally," Clark said. "But the asset classes themselves are not significantly different than - I would argue - their non-Internet brethren.
"An auto deal would go more or less like an auto deal, and a credit-card deal would go pretty much like a credit card deal," he said. "I think as people become more comfortable with it, they'll evaluate it side by side with their non-Internet alternatives, and as long as the structural enhancements are on there, to make them sort of on par with the non-internet side, I think the rest is pretty much straight forward."
It's Really An Information Thing
Most industry specialists agree that with the Internet, it's not so much a new product as it is a new methodology.
From the management perspective, Ahern argued that the real difference in leading an online transaction is the delivery of information.
"We put together a site for the Ford transaction that not only included information on this deal but also had a slew of other things that investors could look on," Ahern said.
The site included the prospectus, comparable securities, information on both Ford Credit products and Ford retail products, such as automobiles. The site included information on Ford's credit spread history, links to SEC filings, information on Lehman's research on Ford in the past as well as links to releases about Ford from Moody's Investors Service, and Standard & Poor's Ratings Services.
Additionally, part of the Web site enabled Lehman's institutional investors to indicate their interests online, as well as place orders.
"Just to point out, there was a level of investor confidence in doing this online," Ahern said. "About two-thirds of the indications we got from investors about the deal came through the Internet rather than phone calls."
So who's diving in next? Investors are wondering.
"Any large, frequent issuers would be a candidate for the same type of offering and venues Ford is using," Murphy commented.
Though in order to be offered to the retail community, as the Ford transaction was, Murphy argues there will be limitations based on the type of offerings. If retail investors are getting involved, it must be a pure public deal. So it's really more suited to large frequent issuers.
"I think you will see more large issuers not only disseminating information more frequently over the Net... but I think you'll see more issuers being more transparent about the performance of their asset-backed securities, and the underlying collateral as well," Murphy said. He added that right now fellow Big Three issuer GMAC is a big provider of information, such as pool performance online.
"This Ford thing is kind of a bellwether," he said. "It seems to be a pretty cheap distribution method."