The auto ABS sector is in reverse gear, and threatens to suppress total traditional asset securitization numbers for 2006, according to Wall Street estimates. Issuance will reach $675 million for all of 2006, about 6% shy of 2005's volume, according to recent estimates from Citigroup Capital Markets.
Citigroup's estimates look decidedly more discouraging despite revisions to the numbers that include production from the residential MBS, CDO and student loan auction rate sectors. The bank added another $5 billion from the student loan sector and $15 billion more from home equity loan issuance, but production estimates from the auto sector, which were off by $15 billion, offset those gains.
After taking those factors into consideration, says Citigroup, overall ABS supply will drop 12% for all of 2006.
Being a wild card sector of the ABS market, auto loans secured $86 billion in asset-backed securities in 2004, before cranking out $115 billion in volume in 2005, Citigroup said. The company expected the auto loan sector to at least match 2005 volume this year, but instead revised its expectations down to $100 billion in projected ABS volume from $115 billion.
Citigroup is not the only company that thinks a downturn in auto loan ABS deals is on the way. After noticing that major issuers such as Ford Motor Credit and General Motors Corp. sought alternative forms of financing as well as the virtual disappearance of the midprime sector, analysts at Barclays Capital adjusted its somewhat aggressive expectations for new auto loan ABS deals, said Joe Astorina, a director of securitization research at Barclays Capital.
Ford and GM have tapped commercial paper, a form of short-term corporate debt, and dealer floorplan financing, to fund their operations. As for midprime auto loan lenders, former major players such as Bayview Acceptance Corp., Onyx and WFS Financial have been acquired recently, and their new owners do not appear eager to issue as much asset-backed paper as their captured companies.
Other asset classes, such as credit cards and home equity loans are on pace to beat 2005's numbers.
"Autos are the one sort of laggard, in terms of issuance," Astorina said.
As for the mortgage-backed securities sector, issuance for 2006 is closely tracking production for 2005, at least through June, said Michael Youngblood of Friedman Billings Ramsey. Prime issuance had an average monthly volume of $23.6 billion, up from $22.3 billion in 2005. Momentum is building in the Alt-A sector, boosting average monthly volumes to $26.1 billion, compared to $15.5 billion in 2005. Subprime mortgage ABS issuance was $46.7 billion, as opposed to $46.9 billion.
"In terms of nonagency securities, we're tracking in line with or slightly ahead of 2005, as long as the slope of the yield curve holds its current shape," Youngblood said, adding that 2005 "was the fourth consecutive record year of non-agency issuance. It is possible to set a new record."
Getting down to consumer fundamentals, the underpinnings of asset securitization performance, Citigroup noted that Americans appear to be in stable fiscal health, despite a negative savings rate. The personal savings rate was -0.3% in the fourth quarter of 2005, and in May 2006, was six times lower, at 7%. Prior to 2005, the personal savings rate had not been in negative territory since the Great Depression.
"Several factors point out that the consumer may be running out of steam," Citigroup said, since the current savings rate does not reflect pending resets in interest-only mortgages and borrowers confronting a slowing housing market.
There is hope yet for the leveraged American, Citigroup suggested. Consumers' financial assets exceed mortgage debt on nonfarm homes by a six-to-one margin, giving consumers a strong cushion. Employment numbers are also encouraging, Citigroup said. During the first six months of 2006, gains in nonfarm payrolls ranged from 92,000 to 200,000 per month, even though numbers for April and preliminary estimates for May and June were on the lower end of that range.
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