Mitsubishi Motors' senior bonds may be one of the few places relative value still exists in the overbought ABS market, but questions about servicing and the strength of U.S. operations still loom for the auto manufacturer. If Mitsubishi can successfully dodge those concerns, analysts agree its ABS presents an attractive option in the auto sector.
"Investors who do their credit homework could be rewarded," said Joe Astorina, auto ABS analyst at Barclays Capital. "There are selective pockets of value within Mitsubishi's senior bonds."
In a report issued last week, analysts from Lehman Brothers highlighted several points that weigh in favor of Mitsubishi Motor Credit Corp. of America transactions, primary among them being the stable collateral performance of late. "The issues surrounding Mitsubishi Motors' corporate performance have not affected collateral performance. Trust performance has stabilized since the end of the deferred loan period, when defaults peaked in the high teens. Defaults, although elevated, have remained range bound, allowing credit enhancement to build," according to the report.
The Lehman analysts point out that defaults from the early 2001 and late 2002 vintages are in the mid-to-high single digits, while the more troubled late 2001 and early 2002 vintages have seen 3-month conditional default rates in the 10% to 12% range, versus the 15% to 17% CDR peak many trusts experienced earlier. "Furthermore, with 60-plus delinquencies at manageable levels, barring a servicing disruption, we do not expect a spike in defaults," writes Lehman analysts.
The bright skies end there, however, as Lehman notes there are a few potential pitfalls for those looking to invest in Mitsubishi auto paper. The primary concern is Mitsubishi's U.S. auto sales, which have decreased 50% in the past year and are one-third the amount of sales from two years ago. Mitsubishi has publicly affirmed its commitment to the North American market, but still the company could be forced to pull out of the U.S. altogether if sales continue to wane. "Closure of Mitsubishi's North American auto operations would adversely affect recovery values, lowering cash flows to the trust if Mitsubishi Motors were to pull out of the U.S. auto market, it would increase defaults and severities," writes Lehman.
A more imminent concern is over who will be servicing Mitsubishi's loans in the near future. Lehman writes that the company employs 365 people in its credit office, but expects 300 of these employees to be cut by year-end. The company's consumer loan business is expected to be conducted through a joint venture with Merrill Lynch.
Systems & Services Tech-nologies, a subsidiary of JPMorgan Chase, now services many of Mitsubishi's most credit-impaired loans, and is servicing loans in all outstanding MMCA deals. Over the past 25 months, the number of loans being serviced by SST has dropped from 80,000 to 43,000 accounts totaling $600 million, and it is not known whether those loans will continue to be serviced by SST or not.
"[SST] is the largest third-party auto loan servicer in the U.S., which probably places them high on the list of possible acquirers for MMCA's auto loan portfolio. Any portfolio sale may not result in improved collateral performance, due to the diverse nature of the loan programs - primarily balloon and deferred loans - included in MMCA securitizations. However, provided the ultimate acquirer is stronger and more financially sound than Mitsubishi, the deals should benefit from having such a servicer in place," wrote Astorina in November.
"A transfer of loan servicing could increase default levels in the MMCA trusts. The majority of the Mitsubishi portfolio is currently being serviced internally. A disruption in these loans would, on [a] dollar basis, affect a significant proportion of the portfolio," writes Lehman. In the near term, however, the bank does not expect SST's loans to be transferred.
Taken as a whole, Lehman says the senior bonds offer value versus mezzanine single-A and triple-B rated prime paper, particularly for investors with a higher risk tolerance and lower liquidity needs.
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