With fixed-rate deals back in style (to some extent), the auto issuers came out of the woodwork last week, but Will it last? players are asking.
The abundance of auto transactions totaling close to $6 billion worth of deals seen last week and in the pipeline was attributed to the slowing economy and the general belief that the Federal Reserve Board won't continue raising rates.
"In rising-rate environments, more auto paper comes out," said Joe Donovan, head of the asset-backed group at Credit Suisse First Boston.
Joe Astorina, an auto analyst at Fitch IBCA, blames the slow start this year for autos on the Y2K hangover that occurred in the first quarter and on the swap-spread volatility that has been seen throughout this year.
"It just wasn't a good environment for autos," he said. "But now the planets sort of aligned and things came to favor auto issuance."
According to Astorina, auto issuance has been down from what it was last year.
If not for lack of origination volume on the finance-company side, it's a confluence of market factors that have been working against it.
"I don't think we'll surpass the number of auto issuance that was seen last year," he said.
Fixed vs. Floating
If interest rates do remain at their current levels, it is almost certain that the market will be seeing more fixed-rate auto transactions leaking out of the pipeline, sources said.
Recently, the auto transactions have been relatively large. Typically, when a deal is larger in size, the issuer needs to break it up to attract more investors, Donovan said.
"It has nothing to do with underlying receivables - they're all fixed-rate," Donovan said. "It's all in the structuring and the decision at the time. Whatever the market wants, we'll serve up."
An increase for fixed-rate product is expected to happen in the near term, moreover, due to the expected Fed inaction (ASR, 6/12/00).
So far, the stigma associated with subprime home-equity hasn't affected subprime autos, perhaps because of a previous shakedown in the subprime auto sector a few years back.
"This left a less competitive environment as well as more rational underwriting compared to the heydays of the mid '90s," said Kumar Kanthan, a vice president and senior credit officer at Moody's Investors Service. "The prime sector has also seen a similar performance trend resulting from a changing competitive environment: the captives were particularly aggressive in the mid 90s, but have employed more conservative underwriting since that time."
In the heyday, which was 1995-1997 according to Kanthan, the key players deliberately moved down the credit spectrum into the near-prime, in search of a better risk-reward profile, which resulted in higher losses during that time period.
Interestingly, today's market has also seen a reverse with many of the subprime players moving up the credit spectrum.
Going forward, a slowing economy could have a number of impacts on the auto sector.
As opposed to current conditions where many consumers are buying their cars without financing, a stunt in economic well-being would theoretically increase the amount of financings.
At the same time however, if the economy is pushed into a recession, there is a possibility that autos could be hit with defaults and delinquencies
"Based on all the macroeconomic events that go along with a recession ... it is obvious that certain luxury items are the first to go for consumers and unless the automobile is their lifeline and they face the choice of, Am I going to pay my mortgage or my auto loan?', more times than not a borrower is going to pay their mortgage," said Fitch's Astorina.
