Regional banks like M&T Bank and Fifth Third Bank find that their inexperience in Auto ABS issuance is reflected in the wider spreads relative to more experience captive finance auto ABS issuers.
M&T Bank’s priced its first prime retail auto ABS securitization, MTBAT 2013-1, last week.
The deal totaled $1.4 billion and priced its one-year , fixed rate, A2 notes at 32 basis points over the Eurodollar synthetic forward curve, 18 basis points wider than Toyota’s 1-year notes that priced on the same day.
“Toyota has been a regular issuer in the term ABS market since the 90s,” explained a JP Morgan report. “MTBAT priced more in line with Fifth Third’s 1-year triple-A (FITAT 2013-1 A2), which priced in mid-August at a spread of 25 basis points.”
M&T Bank and Fifth Third have over 50 years of experience in auto lending but the banks, as is the case with regional banks in general, have a short ABS issuance history.
On the other hand, captive finance companies, like Toyota, have 20 or 30 years of securitization experience and tap three to five times per year, according to Moody’s Investors Service.
Increasingly, regional banks like M&T and Fifth Third are tapping the auto ABS market.
According to a Moody’s Investors Service report, these issuers are turning to securitization in part because of pending new regulatory capital requirements. They target Auto ABS because “they can optimize their balance sheets by off-loading low-yielding, low-loss assets.”
Moody’s explained that the Basel III regulatory capital requirements will require minimum Tier 1 capital levels, which include auto ABS. “Banks can remove lower-return auto loans from their balance sheets and deploy the proceeds from auto ABS into assets with different risk profiles,” according to the ratings agency.
But pricing may also be impacted by the relatively higher ABS pool losses expected for regional bank originated deals compared to captive finance auto ABS deals.
Regional banks have historically offered loans with higher APR in comparison to loans offered by the captive finance companies. In order to compete, the banks lend against used cars and offer loans with longer terms. “These adverse characteristics can lead to higher pool losses than for loans with comparable FICO scores that captive finance companies securitize,” according to Moody’s.
M&T Banks 2013-1 transaction has a loss expectation of 1.15%; Fifth Third’s 2013-1 deal has a loss expectation of .65%, according to Moody’s. Both of the deals have a weighted average FICO above 700 with a weighted average term loan of 68 months.
By contrast, the captive finance deals originated by Honda (2013-3), Ford (2013-B) and Nissan (2013-B) have a loss expectation of .50%, .85% and .85%, respectively. Toyota, which has a more limited issuance history, has a loss expectation of .40%. These deals are structured with a weighted average FICO above 700 and with average term loan of 60, 62 and 63 months.