As the economic outlook has worsened, ABS investors have placed an increasingly higher value on the credit profile of issuers, sources note, with higher-rated finance companies consistently besting their middle- and lower-rated counterparts.
In the past two weeks, for example, ABS stalwarts GMAC and MBNA each brought deals that priced cheap versus comparable offerings from higher-rated entities.
The trend is expected to only continue, as the rating agencies put a greater onus on issuers to tap securitization markets and maximize liquidity available in the capital markets.
"The tiering usually seen in the primary market becomes more pronounced in an economic downturn," said Merrill Lynch researcher Dan Castro.
Joe Donovan, head of asset finance for Credit Suisse First Boston, agrees there is more noticeable tiering, but credits numerous other factors for this as well.
In the case of GMAC and MBNA, investors cited the financial strength of the issuers as the reason why the bids were stronger for deals from Toyota and Citibank, respectively. This is somewhat of a shift, as liquidity had been the top concern of investors since the 1998 credit crunch, which gave the edge to the market's most frequent issuers.
Primarily, Donovan notes it is erroneous to compare a monoline credit card issuer with one of the largest, most diverse banks in the world. Investors clearly favor financial strength and stability, as one buysider who bought both Citibank and MBNA paper said: "Although it is hardly the case, should the economic downturn become severe, there is perceived added stability with Citibank."
Even MBNA's securitization guru Vernon Wright concedes that MBNA has a different focus with different risks than a commercial and investment banking entity. But the fact that Citibank can borrow at double-A levels in the unsecured debt market outside of ABS, while MBNA has to pay triple-B spreads, favors megabanks.
In the auto sector, Toyota can fund at levels that almost no ABS issuer has access to, and it is actually cheaper for the Aa1/AAA credit to sell debt than to securitize. As a result, Toyota retains the single-A-rated tranches of its ABS offerings because it just isn't economical to pay single-A levels to investors.
Look for this trend to continue, according to Donovan, as rating agency pressure is expected to increase with continuing lags in corporate earnings. Citing Fitch's scrutiny over the securitization practices of Household Finance, "The agencies would like to see issuers maximize access to all capital markets, therefore increasing liquidity," said Donovan.
Fitch recently changed its outlook on Household Finance to negative from stable, partly because the company was not securitizing enough of its real estate receivables. (see ASR 1/21/02)
