The first half of 2002 was better than most had predicted for asset-backed securities benefited from the corporate debt market that apparently refuses to turn the corner. Blowups continued in the unsecured debt and equity markets, driving investors to the safety of ABS, including many first time buyers, despite continually tightening spreads.
As expected, supply is on pace to reach record levels again this year, with new issue offerings getting larger and larger in size and rating agencies pressuring finance companies to reduce exposure to certain aspects of consumer credit through securitization.
New issues in the first half of the year were routinely increased in size, and reverse inquiries were plentiful. Factoring in the increased purchasing activity of the Government-Sponsored Entities, and the the increased allotments of non-triple-A rated classes of ABS, supply totals more than $200 billion through June. This is a 16% increase from the halfway point of 2001, spurred by three of the five largest volume months ever (March, May and June) and a one-week period (March 18) that totaled $19 billion.
The largest surge in supply came in the home equity sector, where volume was 36.9% greater than through the first six months of 2001. As was expected, low interest rates prompted home equity originations and refinancings. Also, Bank of America's EquiCredit unit, which announced last year that it would securitize the majority of its $21 billion portfolio, has sold $10.3 billion of home equity loan-backed notes to date.
Auto loan supply totaled $45.5 billion, up 25.6% from the first half of 2001 and credit card issuance was actually down 6.59% versus first-half 2001, levels with $38 billion of supply (see chart).
Thus far, the top issuers of 2002 are as follows: Ford Motor Credit with $10.8 billion; EquiCredit with $10.3 billion; GMAC-RFC with $8.3 billion; Sallie Mae with $6.6 billion. Chase has sold $10.4 billion of auto, card and home equity loan supply. MBNA Bank America has brought $5.2 billion of credit card supply and Citibank has sold $4.8 billion in the card sector.
Despite the added supply, spreads have continually tightened this year, particularly in the home equity sector, where supply-driven widening fears surfaced late last year. Credit card spreads threaten to move to sub-Libor levels at the front end of the curve, and top-tier auto spreads are currently in the single digits over Swaps across the yield curve.
Using Ford Motor Credit as an example, spreads have tightened 19 basis points for one-year fixed-, 14 basis points for two-year fixed-, and 11 basis points for three-year fixed-rate supply this year, comparing the first deal of the year from the sector's leading auto issuer with the most recent transaction.
But with all the strong performance seen in the first half of the year, the outlook for the next six months is not as rosy. Having outperformed expectations, analysts are starting to predict the possibility of spread widening for the ABS market.
"While asset-backeds have performed very well over the first half of the year, with 120 basis points of positive return versus Treasuries, versus negative 178 basis points of return for corporates, the carry in ABS is much less attractive going forward," notes Lehman Brothers ABS researcher Arthur Chu. "In the second half of the year there is little upside in ABS spreads. Any potential upside is available in other markets." JPMorgan Securities' Christopher Flanagan concurs, "ABS spread tightening potential appears limited at this juncture."
But as previously noted, rather than positive technicals in ABS, it has been headline risk on the unsecured side that has primarily led to the strong performance this year amid record supply. "It has been bad news in other markets that have driven spreads tighter," added Lehman's Chu.
With a few issuers having the potential for a blowup in the ABS market and the economy not turning the corner as had been expected at the start of the year, either the spreading of bad news to ABS or the turnaround of the unsecured debt and equity markets could lead to cheapening across all sectors of the ABS market.
