UBS Warburg commented on the significant tightening in auto ABS in this week's Mortgage Strategist, attributing the trend, in part, to the market's over-expectation of supply when the year started. Most of the market was anticipating a spate of issuance from the larger players, such as Ford Motor Credit and GMAC, as conditions in the corporate market early this year looked less than stellar, UBS Warburg said.
Spreads in the corporate market, meanwhile, have come in considerably since the start of the year. "As it turned out, issuance this year so far has come in below expectations, and unsecured auto paper has tightened along with other corporate sectors," UBS researchers note.
Last week, GMAC priced a massive round of multi-currency unsecured debt issuance, to the tune of almost $17 billion (U.S. equivalent). At least $6 billion of this is dollar-denominated, according to published reports. Prior to that, GMAC had already issued about $5.5 billion in unsecured corporate debt year-to-date, by Thomson Financial's count.
Ford, on the other hand, has issued a mere $600 million in unsecured paper this year, versus $5 billion-plus in the ABS market. By Thomson's tally, Ford issued $24.9 billion in corporate debt versus $16.4 billion in ABS in 2001, and $3.3 billion in corporate debt versus $12.5 billion in ABS in 2002. Warburg notes that Ford corporates were punished badly last fall on reports of the company's deteriorating financial condition.
"Ford's financial condition has improved in recent months, and Ford has not yet found it necessary to increase reliance on ABS issuance," UBS researchers write.
Meanwhile, UBS estimates that first-half auto issuance is 20% behind last year's pace, annualized. Funding needs are down partially due to lagging car sales versus last year's pace, although not substantially. This is also offset in part by lower down payments and thus higher LTVs in car loans, Warburg notes.
Despite the historic tightening in prime auto ABS, UBS is positive about the sector and sees only minor potential for widening, unless the economic picture further
"There remains an almost insatiable demand for short, high-quality paper - which puts most auto ABS securities in the market's sweet spot as far as demand is concerned," UBS concludes.