Securitizations stemming from auto whole-loan sales have emerged as an attractive alternative liquidity source for lenders, accounting for $3.3 billion in new-issue term ABS last year, and almost $7.8 billion over the past two years, according to research from Fitch Ratings.

Credit Suisse First Boston managing director John McWilliams said the market is likely to continue growing in the near future.

"We still look at it mostly as a strategic and opportunistic market as opposed to a regular market, but we do expect to see some growth in 2004," he said. To date, CSFB has yet to principal auto-loan collateral for the purposes of securitization, although it remains something the bank would be open to.

This trend is evidenced by the two Whole Auto Loan Trust (WALT) transactions, which priced in each of the past two years. Backed by loans purchased by Bear Stearns & Co. from DaimlerChrysler N.A. Holdings, Ford Motor Credit (including Ford unit Volvo) and General Motors Acceptance Corp., the two WALT deals totaled $5.6 billion. Principal finance rivals Citigroup Global Markets, Goldman Sachs and Morgan Stanley have each sold smaller term securitizations backed by acquired loan collateral.

While the nascent market has yet to challenge the whole-loan volume in the residential mortgage sector, Fitch director Thomas Nieliwocki is confident that it will further expand as issuers eye whole-loan sales for possible capital relief. Fitch estimates that over $20 billion in auto loans have been sold on a whole-loan basis over the past two years, which would leave close to $12 billion in whole-loan sales as potential ABS supply. Many of these transactions have been, in large part, driven by the search for capital relief, Nieliwocki added.

At issue, however, is the fact that only certain whole-loan transactions could potentially qualify the seller for capital relief, provided the transaction meets the rating agency's specifications. Specifically, Fitch stipulates that in order to qualify, the seller must relinquish all residual interests as well as the right to repurchase receivables over the life of the pool.

"Every institution has their own financial issues to address with these types of transactions; capital relief could potentially be a significant reason for doing it," he said.

Strangely, however, while the rating agency is prepared to grant the coveted relief, it has yet to materialize. "Some transactions will ultimately provide the seller capital relief," Nieliwocki said.

Moody's Investor Services Senior Vice President and resident off-balance sheet specialist Barbara Havlicek has also seen a modest uptick in auto whole-loan transactions, and said that, should the rating agencies come out firmly in favor of capital relief for these transactions, volume could increase dramatically. However, capital relief is by no means certain, she said.

"There are companies that have been looking for capital relief for their whole-loan sales, and on their face, they may appear to warrant it. But the analysis is complex and there is no easy answer. You have to factor in how that asset risk being sold relates to the remaining risks of the company," she said.

There is a clear sense that a whole-loan sale is broadly positive for a company, Havlicek said, but to what extent depends on the structure and how the servicing fees are set up.

"We have not given any capital relief [for whole-loan sales]. We would be more likely to give some kind of qualitative comment as opposed to a quantitative judgment," she said.

Moody's is still working to identify hidden risks that could cancel out the benefits, she added, and the rating agency is not yet willing to offer concrete relief until that question is resolved.

Havlicek feels it would be premature to forecast the current trend toward auto whole-loans too far into the future.

"The market needs to develop. If a whole-loan sale is done today and the benefit wears off, you need to be able to go back into the market when the deal matures, and so you need to have a market with depth. Companies need to be able to access it in a reliable way," she said. - SM

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