Market participants remain optimistic that new deal flow will hold, despite bankruptcy fears from the Detroit Big Three and a slowdown in sales volume.
For the May deadline, there are a host of issuers looking at potential deals, Jason Grohotolski, assistant vice president and analyst in the asset finance group at Moody's Investors Service, said on a conference call last month. "There has been meaningful activity, and it looks like a healthy pipeline going forward."
In fact, Harley Davidson and Honda Motor Co. are prepping ABS deals for TALF's third round.
While the April subscription date for TALF was not as much as people hoped, Stuart Litwin, partner at Mayer Brown, noted that there were some issuers that wanted to be first out of the box for the March date, and for others it took longer to get their deals done, he said. "We expect that the May subscription date will be bigger," he said.
Indeed, the auto ABS market has largely been functioning throughout the crisis except for the slowdown at the end of 2008, Litwin said.
While TALF has been helpful, Litwin pointed out that not all of the investors in these deals have been TALF buyers. He said. "It is a wonderful thing that TALF has brought additional investors to the market. However, it is very important to look for signs of non-hedge-fund investors, the traditional auto ABS investors that did and will continue to invest in auto ABS once TALF expires," he said.
In round two of the TALF financing, last month, CarMax came to market with a $980 million securitization, Carmax Auto Owner Trust 2009-1, according to the ASR Scorecard database, backed primarily by new and used autos and light-truck loans. One-year triple-A paper priced at 215 basis points over the benchmark. Two-year triple-A paper priced at 265 basis points over the benchmark. Three-year triple-A paper priced at 400 basis points over swaps. The deal used a senior subordinate structure, and the class 'A' notes rated triple-A were all eligible collateral under TALF. Banc of America Securities and JPMorgan Securities led the deal.
Prime auto ABS issuer World Omni also came to market with an $828 million deal, World Omni Auto Receivables Trust 2009-A. Triple-A paper priced at 280 basis points over swaps, according to the ASR Scorecards database. The triple-A class 'A' notes are eligible collateral under TALF. Banc of America Securities and Barclays Capital were lead underwriters on the deal.
This is in addition to three TALF-eligible auto deals from Huntington Auto, Nissan Motor Corp. and Ford Motor Co. totaling $5.2 billion of TALF-eligible securities that got done in March under the first round of financing.
Outside of TALF, there have also been several auto ABS deals that have gotten done, primarily by higher-quality issuers. "There is a need to issue, and I would expect that there is pent-up demand. It all depends on investor appetite," said Joseph Astorina, a consumer ABS analyst at Barclays Capital. Honda and Nissan Motor both issued auto ABS deals this year before TALF went into effect.
And last month Banc of America Securities and JPMorgan Securities led a $1.305 billion deal for USAA, USAA Auto Owner Trust 2009-1. Triple-A one-year paper priced at 155 over the benchmark. Two-year triple-A paper priced at 165 over swaps, and three-and-a-half-year triple-A paper priced at 300 over swaps. The deal was a benchmark deal for the sector, according to one source, because it demonstrated that there is investor appetite for the more traditional securitizations, as well as TALF deals.
Although volume will not be as big in 2009 as it has been in past years, Litwin predicted that most of the traditional auto issuers probably will do auto loan deals this year. However, an important issue is sales volume. "If cars aren't being sold, fewer loans will need to be financed in the auto ABS market," he said.
Less Cash to Burn
Indeed, with car sales down, consumer financing still remains an issue, especially in the subprime auto space that currently does not have access to TALF funding. AmeriCredit Corp., a subprime automotive finance company, said that it has pulled back on origination volume. "The U.S. consumer has less access to the auto space," said Susan Sheffield, executive vice president of structured finance at AmeriCredit. "We are not originating as much volume because funding is extremely limited."
If TALF is going to be helpful for the subprime auto sector, it needs to be expanded vertically to encompass below-triple-A securities, said Chris Choate, executive vice president, chief financial officer and treasurer of AmeriCredit. Indeed, because losses are higher in subprime auto securitizations, the subordinate pieces need to be bigger to support the triple-A paper. "In order to make a subprime auto deal economical, we need to be able to sell through double-A and single-A paper," Sheffield said.
Fortunately, the company has some leeway after completing three transactions last year, including two in the second half of 2008 that took care of quite a bit of the company's inventory. "We don't have to issue in 2009; we have the flexibility to wait," Sheffield said. However, both Sheffield and Choate agreed that if TALF was extended, AmeriCredit would consider doing a deal.
Net Losses Spring Up
Although sales volume is down, collateral performance in pools of these securities appears to show a small recovery. Recent data shows signs of a slight improvement in net losses, which should continue, Astorina said.
This is primarily because of the "seasonal effect" where annualized net losses and 60-plus-day delinquencies rise heading into and throughout the winter months because of heightened consumer spending. Losses improve in late spring as tax refunds come in and bottom out in summer before rising again in fall, Astorina said. Given the macroeconomic conditions, the improvement is not as significant as it once was, especially in the past couple of years where there have been higher highs and the lows have been higher than levels have been historically, he said.
Other signs of improvement are in the wholesale vehicle sector, where values rose in 2009 after crashing to record low levels in late 2008. New vehicle supply cuts and consumers opting for cheaper used vehicles boosted used vehicle values by nearly 8% since October 2008, according to a report from Fitch Ratings last month. "At a minimum, this should lead to strengthening recovery rates in coming months and thus reduce loss severity, and ultimately loss rates over the short term," the rating agency said.
As of ASR's press time last Thursday, Chrysler filed for bankruptcy protection Thursday and will form an alliance with the Italian carmaker Fiat Group. The news came after talks with a small group of creditors fell apart only one day before the government's deadline for the auto company to come up with a restructuring plan. Meanwhile, General Motors (GM) Bondholders' Ad Hoc Committee on Thursday released its proposed plan to save GM to avoid a bankruptcy process. This proposal will apparently save U.S. taxpayers $10 billion in cash and stop the GM's nationalization. It will also offer a fair and equitable allocation of new GM equity across all stakeholder classes.
While auto ABS deals are bankruptcy-remote vehicles, concern has been focused on dealer floorplan bonds. Manufacturers provide a lot of support to the dealers, and no one knows what will happen to the dealers if manufacturers go into bankruptcy, a market participant said.
A bankruptcy on the manufacturer level could have an impact on dealer sales volume. And dealers frequently have repurchase agreements that might not be able to be honored by less creditworthy manufacturers, market participants agreed.
Troubles at a manufacturer level could also have an effect on resale values, Astorina said. If borrowers default, there will be a need to resell vehicles. If the manufacturer is having difficulties, the values of the cars will be worth less, resulting in higher loss severities, he said.
While it is not a cure-all, the administration's Warranty Commitment Program will back the warranties of Chrysler and General Motors by setting up an account to be funded by cash from the manufacturer and a loan from the U.S. government. The program will pay for repairs covered by the manufacturer's warranty on each new vehicle sold by a participating domestic auto manufacturer during its restructuring period. The contribution will be 125% of the projected costs by the manufacturer to pay off the claims under the warranty on that vehicle.
The program, which is part of the Troubled Asset Relief Program, or TARP, should be supportive of vehicle prices and, therefore, recovery rates on repossessed vehicles and vehicles returned at lease termination, said Bank of America/Merrill Lynch analysts in a report last month. The U.S. Treasury will contribute 110% of the cash required for the accounts while the automakers contribute the remaining 15%, according to reports. A special-purpose company holding the funds would be run separately from the automakers and continue to pay warranty claims even if the auto manufacturer goes into bankruptcy.
The market also remains challenging for auto lease deals. "While TALF is helpful because auto lease deals can be financed under TALF, there is still residual risk," Litwin said. Indeed, in many deals, a lot of maturities won't happen until after the three-year TALF maturity, he said.
Although, Moody's Grohotolski said that with the smaller lease origination volume, he expected that there will be limited TALF activity. "Some issuers have shied away from originating lease product as residual values became a little more volatile over the last year," he said.
Furthermore, Chrysler, Ford and GMAC have been some of the more common issuers in this space over the years, and at this point in time, Grohotolski said that there is a high degree of linkage between these deals and the manufacturers and a degree of risk that is incompatible with a triple-A rating at this time for the Detroit Big Three. "This may limit the potential benefits for TALF in this space," he said.
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