European auto paper got off to a slow start this year, but market sources say that auto ABS supply has historically been uneven compared to the U.S. However, changes on the horizon could see issuers becoming more dependent on securitizations.
"The relative immaturity of the European auto ABS market, compared to the U.S. auto ABS market, means that issuance volumes in Europe are about 10% of that in the U.S., despite a comparable volume of vehicle sales in both economies," explained Paul Geertsema an analyst on the securitization research team at Barclays Capital. "Thus far European auto ABS issuance has tended to be lumpy - in some years we see more and in some less, but going forward I would hazard to say we might see a pick up in auto ABS issuance."
Issuance this year opened up with Cars Alliance Funding PLC, series 2005-1, the first European dealer-floorplan financing securitization. This inventory floorplan financing is used by dealers to purchase new and used vehicles and spare parts manufactured by Renault S.A. and Nissan Motor Co. Loan repayment and liquidation of the underlying securitized receivables generally occurs when the underlying vehicle or spare part is sold.
The transaction was well received, sources said, achieving tight execution and industry players are expecting the asset class, already popular in the U.S., will catch on in Europe.
Exposure to dealer transactions posed some interesting issues, including block exemption changes being implemented by the EU. These new rules allow for multi-franchise dealers and separate car sales and servicing franchises aimed at improved competition. "We expect these rules will see new-car supermarkets established and perhaps increasing competition for subsequent vehicle servicing," said analysts at the Royal Bank of Scotland. "Increased competition may erode dealer margins, although many retailers have already positioned themselves for the changes by operating several manufacturer franchises - some in one location with several distinct outlets."
Ongoing changes from recent EU block exemption rules has already assisted leasing companies - allowing them to act as fleet purchasers, hence negotiating larger discounts, explained Bank of Scotland analysts. "Previously the cars were delivered directly to consumers and they were treated as individual purchases. This may increase car leasing volumes - and subsequent securitizations if bulk purchasing of vehicles and servicing makes leasing more cost effective than outright purchase for consumers."
Captive and retail banks
Also newly marketing DFM Vehicle Loans 2005 offers 747 million of Dutch auto loans exposure for DFM, a subsidiary of VW Financial Services. Two triple-A rated tranches are offered with 5.7- and 7.4-year average lives, along with two pre-placed and retained tranches. A five-year revolving period was structured; the provisional pool included 42,464 loans and 14,410 leases.
Dealers began working on Compartiment TS4, a 450 million French auto loan deal for Socram. The provisional pool included 53,000 loans to private individuals and companies with an average size of 8,552. Triple-A and triple-B rated tranches are available and sized at 405 million and 45 million respectively.
As in the U.S., European auto ABS issuance has historically been divided into two types of originators: captive financing arms and retail banks. According to Barclays, 2004 auto ABS issuance out of Europe totaled $9.74 billion. The top-five auto ABS originators in Europe are finance subsidiaries of auto manufacturers, which accounted for 55% of historical issuance. The remainder has come from independent retail finance houses, explained Geertsema. "Issuance from the independent finance houses vary between those that have established themselves as repeat issuers, such as Sociedade Financeire de Locacao, with five transactions, and those that have used securitization in a more ad-hoc fashion," he said. "For repeat issuers, securitization programs are often part of a deliberate strategy to secure a diversified funding base."
Geertsema looks at future market growth potential with cautious optimism because he suspects that a lot of the funding that will be done this year will come due to the fallout in the corporate sector. These captive companies will be looking beyond their parent subsidiaries for funding and a logical place to turn to will be the securitization markets. But, he adds, the rating agencies might be uncomfortable if a substantial amount of ABS comes out over the next year. "The rating agencies might be uncomfortable with a large amount of good assets leaving the corporate balance sheet via securitization - so I don't think you'll see any of the captive finance subsidiaries go completely overboard in issuing ABS," said Geertsema. "I think the agencies will have made it clear that there is a limit on how much they are comfortable with leaving the corporate balance sheet."
In its industry outlook, Standard & Poor's said that along with growth potential for dealer floorplan receivables, the U.S. automaker performance deterioration increases their reliance on securitization and said it expected more transactions in Europe to be originated by their captive arms.
As for the retail banks, well at the moment its still a question of cost of funding. Geertsema said there is a fair amount of liquidity as a whole via warehouse facilities, it is still cheaper to get financing via bank market. But if the financial market dynamics were to take a turn for the worse, a flight to quality type situation could result and these issuers would seek to access alternative forms of funding.
Chris Greener at the Royal Bank of Scotland said that he expectes higher volumes this year, especially later in the year when Basel II planning is underway. While many participants are planning for the coming rules, few transactions in 2004 focused on the capital requirements, the bank reported in its European securitization market 2005 outlook. Non-bank issuers will likely find ABS the cheapest source of funding with the added advantage of risk transfer. For larger banks, with access to cheaper funding, a combination of risk transfer, diversified funding and reduced capital requirements will drive supply. "Basel II increased bank appetite for 7% (under IRB) risk weighted auto paper," said Greener. "Banks holding portfolios of auto loans will likely find securitization more attractive than securitization of residential mortgages, especially if the auto loans are [made] to corporate entities. This will likely increase volumes as banks prepare for the new rules due 2007."
Greener added that new-car sales in Western Europe for the first four months of 2005 are in-line with the same period of 2004 -versus 3.97 million last year, versus 3,99 million year-to-date, suggesting a healthy flow of collateral going forward.
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