The slowing of the economy has recently caused excessive spread widening in the equipment ABS sector, with recent transactions from Navistar, DVI, and CNH Global all pricing at levels that represent a drastic increase in the spread concession compared to secondary auto spreads, a gauge often looked at by ABS investors, according to researchers at Banc One Capital Markets.
The most recent CNH deal came out at the wide end of price talk; the one-year, two-year and three-year pieces, each for more than $200 million, priced decently. But the three-year piece was fixed at swaps +40, which, on a relative basis to the last deal the company did, was about 24 basis points behind comparable autos. In CNH's last deal the three-year was 15 basis points behind autos, so there was a nine basis point spread widening on the three-year.
Similarly, the single-A sub piece priced at Swaps+120, which is 71 basis points behind where generic single-A autos are pricing. On the company's previous deal, the single-A sub was only 12 behind autos.
"To some extent the spread widening we've seen for equipment lessors is probably a result of the slowing in the economy, the results of which show up among the commercial lenders faster than it has with the consumer lenders in ABS," said Bank One's John McElravey. "The rating agencies have been looking at the corporate ratings of some of these companies - such as Navistar, which was downgraded recently - and they are incorporating some potential for negative headlines with some of these firms. But what we've seen is that the credit performance of deals is good even though Navistar losses are still up."
In the case of CNH, the company was hit hard by the slowdown in the agriculture sector, McElravey added.
Despite the challenging economic environment, McElravey believes that the equipment ABS sector still offers good relative value, especially at these spread levels.
"There are not a lot of ways for ABS investors to diversify outside the consumer sector," he added. "Equipment ABS adds variety to ABS portfolios, and you can still pick up some additional yield. These are solid companies."
Some of these companies have restructured themselves since the last depression to better withstand a slump in demand.
But there is still an element of headline risk, reflected in the pricing spreads, according to the Bank One report. These companies tend to be leaders in their respective industries.
"Like CIT, for instance," McElravey said. "They are an A+ company. There are other factors as well, such as the level of quality of the servicer...There are opportunities for investors who do their credit work to purchase well structured ABS credits at attractive spread levels."