Issuance of public ABS hit a whopping $74.5 billion in the 1Q01 - the largest quarter ever since the inception of the ABS market in 1985! The three major ABS types - home equity, retail and wholesale auto loans and credit card ABS dominated the market with close to 82% of total public issuance. The much anticipated stranded cost or rate reduction bonds (RRBs) issuance totalled $6.8 billion as utility issuers from New Jersey and Michigan found electrified investor demand for their issues, this despite the energy woes and daily news headlines surrounding California's energy crisis. New asset types and less frequent issuers found the new issue market hospitable and investor demand far outstripped the supply that was delivered to the market.
We believe the confluence of a number of key factors have laid the framework that has served to bolster the record new supply including:
*Preference for "safe harbour," triple-A investments from U.S. money managers and total return accounts, which was primarily by turbulent corporate bond markets and the deterioration in U.S. consumer credit quality.
*Strong demand for LIBOR-based retail auto and credit card floaters from international investors, especially from bank sponsored credit arbitrage conduits.
*The acceleration of ABS issuance by issuers looking to take advantage of falling interest rates and strong investor demand for their issues.
During the 1Q01, the launch and pricing of new issue ABS is now sounding like that old broken record - deals are upsized, oversubscribed and priced tighter than the initial price talk. Numerous investors lament that deals are pricing too fast and at tight yields. Even so, the comfort and safety of buying short duration, triple-A securities has been the key driver behind the tight new issue spreads.
Outlook for issuance in 2Q01 - fasten your seat belts!
We believe new issue supply pipeline will continue in the 2Q01 and estimate public issuance will total $65 billion. Like the 1Q01, the three major asset types - autos, cards and HELs - will dominate the new supply. Reverse inquiry from large buyers looking for securities with specific coupon and maturities will continue to be common. We expect fixed- and floating-rate ABS spreads in the commodity ABS types will continue to trade in tight ranges as demand for paper will outstrip available supply.
Relative Value in U.S. ABS?
Finding good relative value plays within the ABS market has become an increasingly difficult task since spreads in commodity ABS (retail auto loans and credit cards) trade in tight ranges. From an ABS researcher's perspective on the U.S. market, ABS spreads are boring as relative value stories are hard to muster. Many buy-and-hold ABS investors, frustrated by the tight spreads in commodity ABS, have turned to alternative structured ABS asset types, like CBOs, CDOs and CMBS, where the spread pickup to retail auto and credit card ABS can be substantial attractive.
Investors are apprehensive about deteriorating U.S. consumer credit quality, causing some to pause and re-examine their holdings of consumer ABS. With the U.S. economy slowing, market participants expect retail auto loan and credit card loss rates to rise. From our perspective, we expect no impact on auto loan loss rates of prime collateral pools while credit card loss rates in prime credit card ABS collateral will increase modestly and peak at 6.50% in the 3Q01. In the non-prime auto and credit card ABS types, we expect loss rates to increase but to not have any negative impact on outstanding triple-A-rated ABS issued by the major established issuers. In essence, we fully expect the major consumer ABS issuers to weather the choppy waters and believe their collateral will perform as expected.
For total rate-of-return investors looking for yield pick-up, we recommend ABS issued by large established originators/servicers of subprime retail auto loans and credit cards. In particular, we are bullish on ABS issued by Americredit Corp. and Metris Companies as these two issuers have demonstrated underwriting and servicing prowess and are the largest lenders to non-prime consumers. During the past two years, ABS issuance from these issuers has increased and liquidity has improved as more and more investors have come to understand their businesses.
retail auto ABS
Americredit Corp. (ACF) is a U.S. consumer finance company that specializes in automobile lending to consumers with impaired credit profiles (i.e., subprime). The company has become a large, frequent issuer of retail auto ABS and was one of top five retail auto loan issuers in 2000. Liquidity in Americredit Auto Receivables Trust (AMCAR) ABS continues to improve as investors continue to gain comfort with their underwriting and credit scoring models. The company has a unique alliance with JP Morgan Chase, where higher risk credit applications are electronically channeled to Americredit for funding.
AMCAR auto loan performance continues to improve, which is clearly the result the company's sophisticated credit scoring models. For example, net cumulative loss rates, a key measure asset quality, continue to decline on 1999 and 2000 loan originations, which likely peak in the 7-8% range.
As seen in chart offered spreads in two- and three-year, fixed- and floating AMCAR auto ABS classes are attractive and trade wide to comparable Big-3 auto issues, like Ford Owners Auto Trust.
credit card ABS
Metris Companies is a direct marketer of consumer credit cards to moderate income U.S. consumers. The company's credit card receivable base has increased steadily since becoming independent from the Fingerhut Companies in September 1998. Portfolio acquisitions have been a key driver behind the company's growth, the most significant being the purchase of $1.3 billion of credit card receivables from GE Capital in June 1999. The company is now ranked as the 11th largest issuer of bank credit cards in the U.S..
Portfolio performance in Metris Master Trust has stabilized as key performance measures, such as portfolio yield, loss rates and excess spreads indicate performance is healthy. The portfolio yield is higher than the bankcard industry and averages 27-29%, which provides ample cushion to any increase in loss rates above their current 11 - 13% ranges. Metris master trust excess spreads are modestly above the industry average and range between 6-7%. We expect the trust's excess spread levels will get modestly squeezed, but still strong to assure that its outstanding CCABS.
The U.S. ABS market had a record issuance in 1Q01 with over $73.4 billion being priced. We believe the strong issuance trends will continue into the 2Q01 and look for $65.O to be priced in the 2Q01. Strong investor demand will keep pressure on ABS spreads and commodity asset types will continue to trade in tight ranges. In the near term, we look for U.S. consumer credit quality to deteriorate but to have no impact on prime consumer ABS issues. For the credit savvy and yield hungry, we recommend consumer ABS issued by Americredit and Metris as their issues offer spread pick-up to prime collateral issuers. We expect a modest deterioration in U.S. consumer credit quality that will short lived with minimal impact on the assets securitized by the major ABS issuers.