After a relatively quiet start to the year, auto securitization volumes kicked into overdrive in early October and market sources said it's likely to continue throughout the fourth quarter. The auto ABS market has been falling into near insignificance for some years now, with the sector poised to show one of the weakest growth rates among the various European asset classes. However, the current pipeline means 2006 is now expected to be a record year in terms of absolute auto sector volume.
Furthermore, the market can look forward to hosting the first dealer floor plan deal. Standard & Poor's analyst Chris Such said that, following the assignment of private ratings to a dealer floorplan securitization in the first half of 2006, he expects to see further transactions of this type during the second half of this year and anticipates the first European rental transaction to hit the market early in 2007.
Basel II implementation at yearend has heavily influenced bank issuers in the second quarter, with significant changes in capital required for different asset classes.
"With Basel II looming, the cost of running such vehicles may well rise, as the capital charge for liquidity facilities increase," said Chris Greener, director, senior credit research analyst in ABS at Societe Generale. "We expect that term transactions now appear more attractive to issuers, allowing them to lock in funding costs and reduce credit exposure."
Deutsche Bank analysts attributed the recovery in auto ABS volumes to balance sheet efficiency for car manufacturers, rather than the need to finance receivable growth. "Indeed, car sales remain flat," Deutsche analysts said. "Auto ABS continues generally to be very well bid, helped to a large extent by rarity and diversification value."
But Heather Dyke, an analyst at Fitch Ratings, said that the increase in issuance from Spain and Germany could be tied to a rise in overall origination consumer assets volumes. Dyke said that Spanish banks are also increasingly moving into unsecured consumer lending in a bid to gain more substantial spread margins and, at the same time, there is a growing demand from consumers for debt products. "Securitization enables the originator to free up capital and provides an alternative and competitive funding tool," Dyke said.
Private deals are more active than public ones at the moment, S&P analysts said. The rating agency expects privately rated transactions to dominate issuance for the first time this year. The trend towards privately rated transactions continues from 2005, and accounts for 44% of total issuance in 2006. S&P puts the trend down to the credit rating deterioration of some car manufacturers, which has made their unsecured debt more expensive, making them increasingly dependent on the ABS market. These private deals are either funded in the ABCP market, or placed with sophisticated investors who buy entire transactions or large portions of them.
"European auto ABS issuance has proved extremely strong compared to historical volumes, [but] the total volumes are not that significant when compared to the size of the auto loan and lease market, and were driven by a few large transactions," Greener said. "Many lenders continue to finance themselves by securitizing assets then sold into bank conduit facilities."
What's been in circulation?
The momentum to hit the market from early October is evidence that issuers are herding these deals through prior to the Basel II deadline. By the first week of October, nearly as many auto loan deals priced as had closed so far in the year. And much like the story in the rest of the market, spreads continue to hold despite the deluge of deals all coming at once.
The pipeline hosted deals from Renault and Porsche Bank, while Russian assets counted among the collateral behind these transactions. Austrian FACT-2006, the 600 million ($767 million) auto ABS for Porsche priced its 1.6-year Class A tranche was at a spread of five basis points, and the 3.6-year, low single-A Class B tranche priced at 19 basis points.
The 1.8 billion French auto ABS for Renault subsidiary RCI Banque, Cars Alliance 2006-1, priced its 4.8 year Class A tranche at a spread of 12 basis points. The 5.5-year, split-rated Class B tranche priced at 20 basis points. The pool is supported by 334,315 loans, with seasoning of 15 months.
Russian Car Loans No.1, a 255.8 million auto ABS for Russian Standard Bank priced its 133.8 million three-year Class A tranche priced at a spread of 115 basis points, the triple-B rated Class B notes priced at 155 basis points and the double-B rated Class C tranche priced at 300 basis points over the benchmark. The underlying pool comprises of 59,840 loans, 91.85% of which is used for the purchase of new cars.
The GBP430 million ($810 million) Russian auto loan ABS from MDM Bank, Taganka Car Loan saw its $270.9 million Class A tranche priced come in a bit tighter at a spread of 100 basis points. Its Class B notes priced at 160 basis points fully in line with expectations and the Class C notes at 330 basis points, slightly below guidance.
Lead managers priced the 1.5 billion German auto loan for Daimler Chrysler Bank, Silver Arrow Compartment 2. The triple-A rated 1.3-year 1.4 billion Class A tranche came in at seven basis points and the single-A rated Class B notes priced at 14 basis points.
"All is pretty much in line with expectations [with] a usual busy last quarter of the year," S&P's Such said. "Some deals that probably were planned have been moved into new year, especially some of the ones in newer markets such as Russia. I think we have almost everything that will close this year in house now."
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