GM Financial, the captive financing arm of General Motors, priced $1 billion of auto lease backed securities this week, demonstrating the depth of demand for this expanding sector.
GM Financial Automobile Leasing Trust Series 2015-1 is backed by pool of retail closed-end vehicle leases made to prime and non-prime borrowers for new GM-affiliated brand vehicles.
Deutsche Bank Securities, J.P. Morgan and Goldman Sachs are the lead underwriters.
The senior notes priced at tighter spreads than the most recent deal in the leasing sector, from Hyundai, on March 4. There are tranches with preliminary triple-A ratings from Fitch Ratings and Moody’s Investors Service: the 1.35-year class A2 notes pay 42 basis points over the Eurodollar synthetic forward curve; the 2.43-year class A3 notes pay 46 basis points over interpolated swaps; and the 2.87-year class A4 notes pay 51 basis points over swaps. All three classes of notes benefit from 18.4% credit enhancement.
By comparison, Hyundai priced the 2.1-year and 2.6-year, triple-A rated class A3 and A4 notes of its most recent deal, HALST 2015-A, at spreads of 48 and 53 basis points, respectively, over interpolated swaps. The notes were structured with lower credit enhancement at 17%.
At the junior level, GM's 3-year, AA’/ Aa2’ rated class B notes pay 90 basis points over interpolated swaps, the 3-year, A’/ A2’ rated class C notes pay 125 basis points over interpolated swaps and the 3-year, BBB’/ Baa2’ rated class D notes pay 175 basis points over interpolated swaps.
GM only began originating auto leases in December 2010 but has experienced significant growth in the last two years, following its acquisition of Ally Financial’s international auto finance and financial services business in 2010. At year-end 2014, the sponsor's U.S. managed total lease portfolio stood at $5.96 billion, compared with $2.6 billion at year-end 2013.
Like other lessors, GM is benefitting from higher new car prices, which have made leasing relatively more attractive to consumers who would have to take out longer terms loans or face higher monthly payments to purchase cas. The lease penetration rate has risen to 27.4 % of total auto retail sales, the highest level ever, according to a Feb. 20 J.D. Power and LMC Automotive Report.
“Automakers continue to take advantage of strong residual values to provide attractive lease deals for consumers, stated John Humphrey, senior vice president of the global automotive practice at J.D. Power, in the report.
This increase in leasing has led to larger and more frequent securitizations backed by the asset class, which has the added benefit of bringing additional liquidity to the auto lease ABS market. The class A4 spread differential over prime auto loan ABS has averaged +18 bps since 2011, according to Wells Fargo.
GM’s deal brings new issuance volume in the sector to just over $6.4 billion for the year. That’s nearly double the volume issued over the same period of last year ($3.4 billion), according to Wells Fargo. At this pace, auto lease ABS volumes is sure to exceed Wells Fargo’s full-year 2015 auto lease issuance projection of $18 billion.
In addition to GM and Hyundai, Volkswagen sold $1.45 billion via Volkswagen Auto Lease Trust 2015-A in February and Mercedes Benz and BMW issued just over $3 billion from their respective auto lease trusts in January.
The lack of performance history for GM leases makes it particularly difficult to forecast how the pool might perform over time, though it does not appear that investors penalized the company for this.
However the potential for used car prices to rise is a concern for all auto lease securitization, according to Fitch. “Conditions of the wholesale market over the life of the transaction will impact performance, irrespective of manufacturer," the rating agency stated in its presale report.
So far, used car prices have remained strong, but Fitch and others expect there will be a price to pay for the strong strong auto sales and lease volumes of the past several years. In a recent report, Wells Fargo said it expects the increase in vehicles coming off lease to put downward pressure on used car prices in 2015 and 2016. This could lead to "moderately higher" loss rates on lease securitizations.
Most of the GMALT 2015-1 pool is concentrated in three- to four-year leases. However the high credit enhancement levels in the deal and in other current lease ABS (levels range from 15.75% for the Volkswagen senior bonds to 18% for the GMF bonds), combined with more efficient used car remarketing practices, should help reduce the risk of used car price volatility, according to Wells Fargo.