Toyota Motor Corp., a leader in the production of hybrid gas-electric vehicles, has completed the first “green” auto loan securitization.

The deal, Toyota Auto Receivables 2014-A Owner Trust, is backed by a conventional mix of auto loans. It issued $1.75 billion of notes, a large portion of which were retained by the Japanese automaker’s U.S. finance arm.

However, the approximately $1 billion in proceeds from the deal have been ring fenced to finance sales and leases of new Toyota and Lexus gas-electric hybrid or alternative fuel powertrain vehicles.

Citigroup served as the structuring lead manager; Bank of America Merrill Lynch and Morgan Stanley acted as joint bookrunners.

Toyota considered different ways to structure a green bond, but decided against a transaction backed exclusively by hybrid loans and leases. “The driving factor was that investors really wanted to buy ABS backed by a diversified portfolio,” said Adam Stam, manager of ABS and structured finance at Toyota Financial Services. “We thought what would appeal most to investors was a transaction where the collateral is consistent with all recent Toyota Auto Owner Trust deals. They’re used to seeing these, so they know what [to expect].”

Also, “we didn’t want to use all of the hybrid collateral in one securitization. Once you start changing the selection criteria for a given deal, you implicitly change it for other deals, because there’s a different mix of unencumbered receivables eligible to fold into” other deals.

Proceeds from the offering will be placed into one or more segregated accounts and use of proceeds will be subject to audits by an independent accounting firm, according to the prospectus. Toyota can withdraw from the accounts solely to finance the purchase of the following models: Avalon Hybrid, Camry Hybrid, Prius, Prius c, Prius Plug-in, Prius v and RAV4 EV; Lexus CT 200h and Lexus ES 300h.

Toyota anticipates being able to put the approximately $1 billion in proceeds to work in three or four months. “The reason we are able to do this so quickly is that the Prius is one of the top sellers in Toyota’s lineup,” Stam said in a telephone interview. “It’s been the number one selling car in California for the past two years. Also we definitely get a lift by having a hybrid version of other models: Lexus, Avalon, Camry.”

Stam said that the cost of segregating the funds was not a major consideration. “I wouldn’t say that it’s significant, it’s not a dollar cost but we can’t use the funds [immediately] so there’s an opportunity cost. But on the flip side, there’s quick usage… that minimizes costs. Segregating funds is important to investors, so it’s a little bit of burden, but we definitely think it’s worth it.”

Credit enhancement consists of a reserve account, overcollateralization, a yield supplement overcollateralization amount, excess interest on the receivables and, in the case of the class A notes, subordination of the class B notes.

The deal includes three classes of notes with ‘AAA’/Aaa’ ratings from Standard & Poor’s and Moody’s Investors Service: a $560 million A-2 tranche with a weighted average life of 1.0 year that yields 13 basis points over the Eurodollar synthetic forward curve, for a coupon of 0.41%; a $480 million A-3 tranche with a weighted average life of 2.06 years that yields 15 basis points over the interpolated swaps curve, for a coupon of 0.67%.; and a $165.25 million A-4 tranche with a weighted average life of 3.17 years that yields 22 basis points over the interpolated swaps curve, for a coupon of 1.18%.

Toyota retained the class A-1 money market and the subordinated class B notes. It also retained approximately 10% of each of class A-2 notes, the class A-3 notes and the class A-4 notes.

“Most of the investors we saw are traditional buyers of ABS, of Toyota deals, but we but did see some new investors as well as existing investors that expressed a preference for this transaction because it is green,” Stam said. While it’s hard to say whether existing investors bid for more than they would have for a  conventional deal, “we got some pretty good sized orders. There are some investors that have substantial portfolios of social responsible funds, and that could lead to bigger orders in some cases.”

He added, “the nice thing about an ABS deal is that you can pick the duration you want, depending on the tranche of the deal, but generally they have a fairly short life.”

In the prime ABS market, pricing  changes quickly, so Toyota’s previous  auto loan securitization, which was completed in September 2013, is not a good basis for comparison. “Spreads are generally so tight for triple-A tranches that an old deal is not a really a good proxy,” Stam said. However, “if we look at some of the deals that came out in the weeks before ours, … we weren’t necessarily tighter than those on all tranches, but as tight or in line. The deal priced where market was, and it has been very strong lately for all issuers.”

Reducing funding costs was not the primary goal, however. “We really didn’t do it because we thought there was going to be a big price differential; it was to further Toyota’s environmental profile, and because investors wanted it. We were able to do it, we had a successful deal, but we don’t say deal was successful because it was green bond.”

The automaker plans to issue more green bonds and hopes that its competitors will as well.
Toyota restarted its securitization program in 2010, after being absent from the market for several years. Stam said that asset-backed issuance is “an important component,” of the automaker’s funding program, although it still obtains most of its funding by issuing unsecured, general obligations, in dollars, euros and other currencies.

“We do about 20%-30% of our total funding volume in ABS. It’s not necessarily a target level, but we don’t anticipate it changing dramatically,” he said. “We want to stay diversified. We’re always very respectful of investors, we don’t want to keep accessing the same markets over and over, we want to be able to look at different funding sources.” In addition to unsecured corporate debt and asset backed securities, Toyota also has a big direct issue commercial paper program.

Toyota typically retains the money market tranches of its ABS because it funds this maturity through the commercial paper program. “We have another way to fund that kind of maturity in our debt profile, so we focus [investor placed] issuance on the class A2-A4 tranches, which have a longer duration, and are more valuable to us from liquidity perspective. We don’t have to keep refinancing it [the money market tranche]  as it pays off.”

Toyota also retains a portion of longer-dated tranches, which  go into what the automaker calls its liquidity portfolio. “We have bonds that are already SEC-registered that we can sell in short order. We generally don’t sell them, but there is definitely a market for them. It provides us with a little contingent liquidity as a backup.”

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