Negative headlines that have shaken Fiat-related auto ABS transactions haven't put market players off the sector entirely. In fact auto ABS issuance is blooming, with plenty of room to grow. According to figures released by Fitch Ratings at the beginning of November, the total rated volume of European term issuance with auto ABS collateral had increased to E8.7 billion at the end of 2001 from E450 million in 1997.
What's responsible for this boon in volume? Like in the U.S., one factor is the rise in sales of new and used autos throughout Europe, which has driven the number of new passenger car registrations to 13.8 million in 2001 - up from 12.4 million in 1997. "There has also been a rise in purchase financing and leasing," said Patrick Kearns at Fitch, who added that financed vehicle sales increased in 2001 by 6% over the prior year's figures to E89 billion. Auto leasing rose by 38% to E54 billion in 2001 from volumes registered in 1998.
"Originators are finding that the securitization market offers them a cheaper source of funding," said Kearns. "Ford Motor Credit, for example, can get a triple-A rating in the securitization market, but other sources of financing could be more expensive today given the company's ratings decline. More and more, companies will be faced with weighing [the securitization] market as an alternative."
The issues that companies such as Fiat and Ford have recently faced, in fact, serve to illustrate the performance ability of the companies' respective auto ABS transactions. According to Dresdner Kleinwort Wasserstein, performance data for Ford's latest deal - Globaldrive Series D, backed by new and used German auto loans - indicates delinquencies at .96% with cumulative losses of .06%. Two other deals backed by German receivables, VCL No. 5 by Volkswagen and Fiat's Absolute Funding, have also recorded low delinquencies and zero losses.
Ford is currently in the market with its new Globaldrive E, backed by auto loans that consist primarily of new car loans. This will be the company's first multi-jurisdictional transaction and will include one-third Italian auto loans and two-thirds Spanish auto loans.
"Some auto manufacturers are under pressure," researchers at Dresdner's wrote. "So it's worth looking at servicing arrangements in this context. In general, the ratings agency approach is that if the parent has a good rating or if the servicer in the transaction has a rating, then it is not necessary to have a back-up servicer in place at the outset of the transaction. However, if the parent's rating fell quite dramatically, there could be a back-up servicer requirement stipulated by the agencies in order to maintain the transaction ratings. Alternatively, there could be minimum rating triggers in the deal documentation."
Fitch has rated 60% of the auto ABS transactions that have come to market in 2002. In Fiat's case, or that of any originator experiencing similar difficulties, the rating agency lends particular attention to the servicing of the portfolio. "With large manufacturers like this," explained Kearn, "one particular question that must be asked is What would happen if it went out of business?' Potentially it could, but it's already been considered in the ratings."
Moody's Investors Service recently put Fiat's Baa3' rating on review for downgrade, and the spreads of the company's Italian auto ABS deals have consequently widened by 20 basis points, market sources say. If the Fiat were to continue to face this damaging deterioration, the rating agency could take action against the company's securitization transaction. Analysts at Dresdner, however, noted that the primary risks in these deals are consumer and not corporate risk, and therefore should not be reflected in pricing.
French auto manufacturer Renault is currently in the market with a E1.4 billion auto loan ABS under its Car Alliance Funding. The transaction's triple-A rated notes priced at 17 basis points over three-month Euribor despite the difficulties surrounding the other European auto names. "In auto loans, investors shifted focus from the higher-yielding Fiat and Ford to the more liquid names such as Peugeot and Renault," reported researchers at Salomon Smith Barney. "We have traded about E250 million Renault (CAR) and E70 million Peugeot (COMP) bonds. These bonds trade about 25 basis points tight of Fiat and about five basis points tight of Ford."
European auto ABS originators are predominately banks and finance companies. Among the finance company originators are both companies unaffiliated with any auto manufacturer as well as captive, in-house finance affiliates of auto manufacturers, as in the case of Fiat and Renault.
To date, Italy, Portugal, Germany, Austria, Spain, France and the U.K. are listed as the jurisdictions that have issued auto ABS. According to Kearn, however, other countries are currently looking to tap the market as early as next year. "We have only seen a small fraction of what is out there," Kearn said. He pointed out that there have yet to be any operational lease deals, and noted that such new structures would require different analytical techniques.
