Wells Fargo analysts called the consumer ABS market a “safe haven” for fixed-income buyers with spreads in 2012 reflecting this trend.
Short average life senior bonds of two years or less from the benchmark credit card and prime auto sectors have spreads inside of 10 basis points, analysts said.
In July, total issuance reached $11.8 billion and analysts predicted that this month’s total will be above the 2012 monthly average of $14.3 billion. Similarly, issuance for year-to-date currently stands at $99.8 billion, which is 56% more than last year’s number and 60% ahead of 2010’s.
New transactions continuously impact the price discovery process and issuance. Tighter spreads and strong demand are a factor in creating a “virtuous cycle” where issuers find it favorable to bring even more deals to market.
As the primary source for new consumer ABS, auto ABS represents 50% of the market through July 20. This is compared to an auto ABS share of 56.3% for the year ago period.
“Strong auto sales and a seeming shift toward a greater use of securitization as a funding source by issuers has benefitted the market, in our opinion,” analysts said. “Still, a reduction in the auto ABS sector share has been the result of broad-based increases in other parts of the consumer ABS market.”
Two other sources that have been demonstrating notable strength in 2012 are credit cards and student loans, analysts said. Credit card issuance has reached $14.3 billion, which has exceeded Well’s initial forecast for the full-year of $10.9 billion. In terms of the student loan sector, volume has reached $13.1 billion so far in 2012 versus analysts’ projection of $15.8 billion for the full-year. Credit card lenders appear to be using the ABS market opportunistically by satisfying investors’ need for liquidity as well as targeting longer average life securities to fulfill this demand.
Meanwhile, student loan ABS issuance is roughly 14% over 2011’s year-to-date pace. The firm’s estimate for 2012 volume is $15 billion, but analysts expect the asset class to exceed this projection.
They also noted that the sources of strength for ABS go beyond the larger, more liquid consumer ABS sectors. For instance, equipment ABS issuance is currently at $7.3 billion for 2012 versus $6 billion in the year ago period, while auto floorplan ABS has reached $6 billion year-to-date thus far versus $3.5 billion over the same period in 2011.
In fact, investors have been venturing beyond the benchmark sectors to add further yield without taking on undue credit risk. Wells Fargo analysts said that equipment and floorplan ABS deals are offering worthy relative value for the risk taken. For example, analysts observed solid credit trends in floorplan ABS in the monthly payment rates of regular issuers, which they believe is a significant leading indicator of credit risk in revolving ABS structures.
