Sometimes the thought of diminished ABS issuance, whether one sector or the whole business, rubs people the wrong way. It conjures up thoughts of sluggish productivity, and no one wants such a condition to go on for very long.
Auto loan ABS issuance has dropped off dramatically this year, in line with general industry expectations. Using preliminary numbers, the Dominion Bond Rating Service estimates that total auto loan ABS issuance was down 25% as of May 24, 2007, compared with the year before. One possible cause for the decline: Prime auto loan issuance dropped 45% for the same period, compared with last year.
This is not surprising, considering that some midprime auto lenders, including Onyx, were acquired recently, and their new parent companies do not seem eager to tap the securitization market for funding. Also, between Ford Motor Credit Co., General Motors Acceptance Corp. and DaimlerChrysler, issuance was down significantly, by about $7 billion, according to market participants.
Since May, the Wachovia Auto Loan Owner Trust - a legacy of WFS Financial - did issue $2 billion in asset-backed securities, and USAA Federal Savings Bank is said to be prepping a deal, but the trend remains the same: Auto ABS issuance is down and is likely to stay that way, at least for this year.
These movements are the latest in a few interesting, and arguably welcome, developments in the auto ABS sector over the past few years. Most recently, AmeriCredit Corp., known as a subprime auto issuer, moved up to prime after it absorbed Bayview Financial. In May, it priced a $1 billion securitization, representing the first issue from its prime and near-prime auto loan platform.
"To move up to prime is much better than having a prime originator moving to subprime," said Cherry Allen, a DBRS analyst.
Looking further back, the 1998 credit crunch forced the sector - and many others - to tighten underwriting standards. Near 2000, intense competition among captives, bank and finance companies saw the introduction of loan covenants extending out to 72 months and beyond. Since then, the auto sector has been relatively stable, at least from a credit perspective.
Issuers have reason to be happy, too. The yield curve, which was inverted at the beginning of the year, is dramatically less reversed.
"Yields are up 18 basis points on two and three years," said one market participant. "Money market one-years are less attractive on the longer end."
The auto ABS sector appears content with its smaller, efficient model, and with good reason. The changes present more profitable opportunities for issuers that come to market. The changes also make room for finance companies and nonprime auto ABS subsectors to assert themselves. Hopefully, the finance companies and nonprime auto ABS will use their time in the spotlight to achieve measured, stable growth. The subprime mortgage market, which saw spectacular expansion on the strength of the voracious CDO market, is now sputtering along. It is going to take a little while, maybe a few years, for the trauma to work itself out of that sector's system, especially if the current trend of stagnant or declining home price appreciation continues. Certainly, one of the last problems the securitization market should have to deal with is a crash-and-burn from the auto sector.
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