New issue volume in consumer ABS reached $10 billion for year-to-date 2011 and much of the activity so far this year has been primarily from the auto ABS sector.
The new issues pipeline for Auto ABS has seen a cross-section of issuers in the prime, near-prime and subprime lending areas. And in most cases demand for new issue ABS was reported to be quite strong, with many tranches several times oversubscribed and pricing spreads generally at or inside the initial price guidance.
According to Wells Fargo, this variety of issuers, deals and collateral types provide some insight into the market’s pricing of risk and views on issuer tiering. "For example, spreads on Class A1, money market tranches have revisited, in a number of cases, precrisis pricing levels," explained analysts at Wells Fargo. "Indeed, the return of sub-LIBOR spreads suggests, in our opinion, that many short-duration investors have returned to the securitization market for the additional yield currently available over other money market instruments."
Analysts said that spread tiering also continues to be exhibited in both senior and subordinated ABS. This tiering reflects differences in liquidity and perceived risk among market participants.
One of the new features of the auto ABS market has also been the growing presence of double-A rated subordinated tranches in the capital structure. "In the past, most auto ABS deals utilized a standard triple-A/single-A/triple-B stack of rated securities," explained Wells Fargo analysts
For investors that are able to buy below triple-A rated securities, the addition of the double-A tranche offers good relative value. According to Wells Fargo, the spreads on the double-A rated tranche in the deals completed so far this year have been 30 bps–40 bps wider than the senior bond in front of it, which provides investors with "superior relative value without taking on undue credit risk."