The European auto securitization market is revving up, with this year's deals set to nearly double the output from 2006. The market is bristling with so much activity, sources say, that business is crossing beyond the continental European borders into eastern European countries, and even further.
"A lot of [growth] is general market trends, but autos do seem to be leading the way in some of the newer markets, such as Russia, Kazakhstan, Poland, etc.," said Chris Such, an analyst at Standard & Poor's. "There is resilience in the deals but a general market downturn would also affect the auto deals at some point."
In 2006, secondary trading of auto securities doubled and, according to Such, 2007 should perform similarly. S&P has reported that the total auto ABS issuance volume for 2006 was the highest ever since it began recording volumes in 1999, and the growing trend in new issuance seen over the past three years has quickened over the last 12 months. The total volume of rated issuance reached 17 billion ($23 billion), more than doubling the 2005 issuance volume of 7.5 billion.
New car registrations in Russia during 2006 reached almost 1.7 million. The growth rate of new car registrations between 2005 and 2006 was 22%, compared with 11% from 2004 to 2005. "We consider that car registration data can highlight some valuable long-term trends for potential securitization volumes, although we do not have sufficient data to accurately quantify a direct relationship between car registration and securitization activity," S&P analysts said in the report.
Issuance in 2007 has been far quicker to take off than prior years. Euro auto ABS is beginning to see more and more fresh ink and, according to S&P, more auto loan transactions from EEMEA countries were registered in the last three months of 2006 than in the previous nine. Frank Damerow of Commerzbank said that wherever auto loans take place as part of a consumer lending exercise, auto ABS issuance is being considered.
Potential deals will likely remain attractive for emerging market regions based on the transparency of auto ABS. "The structures are well-researched, comparable and fairly easy to understand, giving the asset class a status similar to the one of credit cards in the U.S.," Damerow said. This leads to a greater confidence in auto ABS growth, when compared to other alternatives in these regions, such as dealings with credit card purchasing.
However, Such is quick to warn against getting lulled into a seemingly low-risk venture. "The risks in these markets would be higher, which is reflected in their lower ratings," he said. "Typically deals would be rated triple-B or single-A rather than triple-A. There can be wider margins though for the same rating, certainly until the market becomes more liquid," he said.
Despite the uptick in volumes, auto securitization is still under represented in Europe, according to Hans-Juergen Fritz, ABN AMRO's head of asset securitization for Germany, Austria and Switzerland and European auto ABS. Although there has already been one transaction from France and three German auto ABS deals totaling 4.1 billion of issuance volume in 1Q07, it is still difficult to tell the strength the market will maintain, though all signs point to a further increase beyond the record high of 2006.
To get an idea of the evolution of the Euro auto ABS market, consider that Fritz first got involved with auto ABS with a deal he helped broker with Volkswagen back in 1996. Since then, mainly captive consumer finance companies such as VW Financial Services, FCE, FIAT Auto Financial Services and, most recently, DaimlerChrysler Bank, in 2005, have tapped the markets. These established, frequent issuers, which are associated with the auto manufacturers continued to show a high level of issuance in 2006, but there has been an increase in the number of non-captive consumer finance companies that launched securitizations backed by auto collateral. Fritz is confident that 2007 will see more of these transactions. These days, more banks, even pure consumer banks, he said, take on auto ABS.
So much so that Fritz said many Euro auto ABS dealers are expecting the Barcelona panel on auto ABS at the Information Management Network (IMN)/ European Securitization Forum (ESF) Global ABS conference to address the market in terms of new asset classes and increasing deal flow.
The auto ABS market is also weathering other changes with ease as well. For instance, in Germany, where 41% of all Euro auto ABS deals take place, the VAT on motor vehicles was increased from 16% to 19% as of Jan. 1. The announcement of a VAT increase boosted car sales in 3Q and 4Q 2006 and ABN AMRO has seen three German Auto securitizations in 1Q2007. Fritz said dealers are expecting this resiliency to continue by taking into account that auto ABS deals typically comprise new and used car financing thus even with a drop in new car sales, such a development is likely to be offset by used car loans.
Simply put, the auto ABS market will continue to be fueled by Europeans' desire to keep up with the Joneses. "I would not expect that we see a significant decrease in German auto securitization during the course of 2007," Fritz said, "considering that many car manufacturers have, or are about to, launch new models."
Russian ABS: artisans at the wheel
Further east, Russian auto ABS still feels more artisanal than industrial, having spit out its first deal in mid-2005, and only two more in 2006. What's more, as mentioned above, increasing vehicle registrations in Russia does not necessarily augur a boom in auto ABS. But growth is still basically guaranteed by other developments, such as increasing investor comfort with Russian existing assets and originators on the make for alternative funding.
This year's pipeline has a single, but substantial, deal about to turn on the ignition. As of press-time, Raiffeisenback Austria was on a roadshow with a transaction now currently sized at $400 million. Led by JPMorgan Securities, the deal is split into three rated tranches and two unrated ones. The final legal on all pieces is ten years.
An unrated piece planned at $227 million is earmarked for a conduit. Among the tranches set for public distribution is a $130 million A tranche rated A-'/A3', respectively, by Fitch Ratings and Moody's Investors Service. A $13.8 million B tranche and $17.9 million C tranche are rated BBB/Baa2' and BB/Ba2', respectively. Like the A tranche, the conduit-destined piece is enhanced by subordination from the other notes.
Fitch rated the highest-grade tranche at the agency's sovereign ceiling for Russia, which is a notch above the rating for Russia itself. "We took a lot of comfort that it's a strong originator," said Nick Eisinger, senior director at Fitch.
The collateral consists of 31,236 dollar-denominated auto loans, concentrated primarily in Russia and secondarily in St. Petersburg. The average LTV of the underlying portfolio is 67.21%.
In ways, the transaction is different from others in its asset class. For instance, the originator is highly rated and 70% owned by Austria's Raiffeisen Zentralbank Osterreich. Also, the underlying loans have performed better than those backing outstanding auto loan deals from Russia.
Still, the deal carries risks typical for Russian deals. For example, Fitch assumed that borrowers in the underlying pools earned salaries in rubles, because precise information on wages was unavailable. This generates indirect foreign currency risk, since a jump in the dollar against the Russian currency could make loan payments unbearable for borrowers.
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