Several major underwriters have stepped up efforts to sell blocks of prime auto paper, cashing in on recent tightening and taking profits, sources said. Currently, prime auto spreads are near historical lows and some believe it's only a matter of time before spread reversion kicks in. On the other side of that position, however, is the realization that this isn't a late 1990s economy and that moderate credit deterioration appears here to stay for the remainder of the year.
While the credit environment is currently rugged, the security and liquidity of prime auto ABS may be losing its allure, investors hinted, due to the limited upside. "There are certain deals from particular issuers we participate in despite the tight spreads, but on other paper we find it too expensive," one investor said.
Spreads for three-year, fixed-rate, prime autos are now seen as tight as two basis points versus swaps, versus the 52-week average of nine basis points over, according to Banc One Capital Markets. While spread tightening has been seen across the board, it has been most pronounced in prime autos.
Analysts at JPMorgan Securities theorize that current pricing reflects geopolitics and uncertainty over the consumer. Spreads to swaps for the top tier names and sectors have been pushed to historically tight levels as the flight to quality bid bolstered asset-backed spreads. Spreads for subordinates and long dated seniors have remained wide as investors remain cautious about the underlying credit.
The disparity in price performance has created improved relative value for subordinates, and long-dated senior ABS, something that is too good for many market players to pass up. In addition, some are under the assumption that if geopolitical tensions decrease there will be a reverse in the flight-to-quality mentality and there could be portfolio shifts to yield over liquidity.
The recent BMW Motor Credit 2003-A priced at the tightest levels in recent memory. While the issuer is somewhat of an anomaly in that it is arguably the most desired captive lender in terms of collateral performance, it also benefited from the current environment of decreased prime auto paper supply, compared to last year.