Issuance of securitizations of prime auto loans is falling short of the pace in 2012, a trend that analysts from Wells Fargo ascribe partly to a shift in consumer behavior from buying to leasing.
In the year through April, prime auto ABS issuance stood at $12.6 billion compared with $45.2 billion in all of 2012. Meanwhile, the subprime space has seen $8.1 billion in deals so far this year, accounting for 13.3% of total consumer ABS issuance.
In research published May 6, the analysts noted that there are fewer new car loans available to be securitized. New vehicle sales are increasing, but at a slower rate than in 2012. Cumulative new auto sales totaled 4.96 million units through April 2013, up 6.9% from the year-earlier period. But the comparative April 2012 figure was up 10.3% from the same period in 2011.
“Slower growth in sales may reduce the need for securitization as a financing alternative among prime auto lenders,” the analysts said.
They added that there was another factor in 2012’s bump up in issuance: “At least some of the 2012 increase in prime auto ABS issuance came from seasoned loans that had been resting on balance sheets and found their way to the capital markets as auto ABS spreads tightened.”
The Wells Fargo analysts pointed to the increasing popularity of auto leasing as a financing option for consumers looking for a new car or truck. This can be seen in the volume of auto leases securitized this year, $5.5 billion through April versus $12.6 billion for all of 2012.
This has lifted the market share of outstanding auto lease ABS to 18% of all auto securitizations, up from 15.4% at the end of 2011.
And it doesn’t help that auto ABS spreads have been widening, making it less attractive compared with other forms of financing available to lenders. Spreads on prime auto ABS gapped out from the fourth quarter of 2012 through early April 2013, after a long stretch of spread tightening begun in early 2012. But spreads have more recently started to narrow again.
Bromwich Breaks RMBS Silence
On May 21, West Bromwich Building Society priced the the first investor-placed prime residential mortgage securitization from the U.K. this year— a £380 million ($579 million) senior tranche from the deal Kenrick No. 2. The spread came out at 65 basis points over three-month BBA LIBOR GBP.
Fitch Ratings and Moody’s Investors Service alike gave the senior piece preliminary triple-A ratings. The A notes have a legal final of 33 years and a weighted average life of 3.1 years. A B tranche was unrated.
The deal is the third mortgage securitization originated by West Bromwich and its second since the financial crisis, according to a Moody’s presale. It was estimated that total credit enhancement for the class A notes would be 12.40% at closing.
Contrary to most U.K. RMBS, there is no equitable assignment of mortgages. Instead, the deal has an originator trust structure, whereby mortgages are ring-fenced in favor of the issuer and West Bromwich.
A dearth of U.K. prime RMBS issuance this year has dampened overall securitization volumes in Europe. The Bank of England’s Funding for Lending Scheme (FLS) has stifled securitization since launching in mid-2012.
The scheme allows banks and building societies to use certain pools of loans as collateral against borrowing Treasurys from the BoE with a maturity of up to four years. Originators can borrow up to 5% of their loan book, plus any next expansion of lending. FLS funding rates are lower, in most cases, than what the market offers, eroding the appeal of securitization. In April, the BoE extended the FLS from its initial termination date of February 2014 to January 2015.
Santander UK Makes More Noise
But Bromwich may not be the only U.K. originator to break the silence this year.
Santander UK is readying an investor-placed securitization of residential mortgage loans, according to rating agency presale reports.
The £1.35 billion-equivalent of sterling- and dollar-denominated notes will be issued via the bank’s Holmes Master Issuer PLC, increasing what has been issued off the trust to £15 billion from £13.2 billion. The notes will be indirectly collateralized by a pool of first-ranking mortgages secured on properties in England, Scotland, and Wales. Santander UK originated all of the loans in the master trust.
S&P said the Holmes Master Issuer’s latest issuance will consist solely of class A notes with 20.56% of credit support. There are three, as-yet unsized tranches; a U.S. dollar money market tranche is rated A-1 by Standard & Poor’s and P-1 by Moody’s Investors Service; a sterling tranche expected to mature in October 2016 and another sterling tranche expected to mature in January 2017 are both rated ‘AAA’/’Aaa.’
While the trust is not issuing any new subordinated notes, a reserve fund, combined with the outstanding class B and class Z notes, will provide credit enhancement to the new class A notes.
Travelers Gets Catty
The insurance company Travelers has completed a $300 million issue of catastrophe bonds through an existing shelf program, Long Point Re III, according to the deal’s underwriters.
Swiss Re, the lead structurer and joint bookrunner, and GC Securities, a joint bookrunner, issued separate press releases today announcing the completion of the deal.
The transaction consists of a single tranche of notes due May 18, 2016 with a 4.00% coupon; it is rated ‘BB’ by Standard & Poor’s.
Cat bonds are a form of reinsurance. In the event that certain triggers are met, the issuer can skip interest payments or even keep the principal to cover insured losses. In a press release issued today, GC Securities said the trigger on this deal is overall losses suffered by Travelers.
It is the second deal of this type that Travelers has issued off Long Point Re III in 2012. The latest issue has several new features that allow Travelers to access funds under a wider range of conditions, according to GC Securities. For example, the definition of a hurricane has been expanded. Also, Travelers has the ability to adjust the level of protection it has once a year.
Currently, the notes will cover 54.55% of losses between the attachment point of $1.25 billion and the exhaustion point of $1.80 billion, according to S&P.
In the first quarter there were two cat bond deals for a combined $520 million. While that is well below issuance in 1Q2012, GC Securities has said it expects 2013 cat bond issuance to come within reach, if not exceed, the $7 billion record hit in 2007.
Batter Up!
Major League Baseball is planning to issue $134 million of notes from its MLB Club Trust, according to a presale published May 10 by Fitch Ratings.
Bank of America is the arranger, said a source familiar with the deal.
The deal consists of $43.73 million of series 8 term notes due in 2020, $5 million of series 9 term notes maturing in 2023 and $85.28 million of series 10 term notes due 2025. It is a securitization of pledged revenues from national broadcasting contracts.
Fitch has assigned a rating of ‘A-’ to the deal. The agency also affirmed its ‘A-’ rating on MBL’s outstanding $669.16 million of term notes and its outstanding $500 million syndicated revolving credit facility.
Proceeds from the series 8, 9, and 10 term notes will refinance a portion of MLB’s outstanding series 1 and 2 term notes.
BlackRock Re-Prices CLO
BlackRock Financial Management has re-priced a $366 million collateralized loan obligation, according to Standard & Poor’s.
The two senior tranches of BMI CLO I were redeemed and replaced with new classes of notes paying lower interest rates, according to research published by S&P on May 20.
The new $249 million class A-1R pays interest of three-month LIBOR plus 94 basis points, a reduction from a 125 basis-point spread on the retired class A-1 notes. And the new $27 million class A-2R notes pay Libor plus 145 basis points, down from a spread of 190 basis points on the retired class A-2 notes.
The older deal, completed in May 2011, has three more tranches that were not re-priced. S&P has assigned an ‘AAA’ rating to the class A-1R notes and an ‘AA’ rating to the class A-2R notes, consistent with the ratings of the retired tranches.
Many CLOs issued since the financial crisis have indentures allowing notes to be re-priced once the non-call period has ended. The transaction is initiated by holders of the most subordinated notes, known as the equity, via a supplemental indenture. Re-pricings are expected to become more common because spreads on new–issue CLOs have contracted sharply over the past year, providing more economic financing.
CLOs are also under pressure to re-price notes because many of their underlying loans are being re-priced in line with a drop in spreads.
EBA Paper Rattles CLO Players
On May 22, the European Banking Authority (EBA) published a consultation paper that could threaten the recent revival of European CLOs.
The paper seeks to clarify the requirements that either the sponsor or originator of securitization retain a portion of the risks in these deals. Article 122a of the Capital Requirements Directive — released by the Committee of European Banking Supervisors in December 2010 — has a kind of get-around: it allows the deal’s sponsor to outsource this risk-retention to a third-party.
But in a note, law firm Dechert said the market was expecting that the EBA technical standards would closely follow the guidelines to Article 122a. Instead, several key paragraphs found in the CEBS guidelines are not a part of the draft technical standards released by the EBA. So it is unclear whether managers of future deals can rely on a third party in the future.
