Asset-Backed Bond Sales Surge in One of 2012's Busiest Weeks
09/10/2012| 05:06pm US/Eastern
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By Al Yoon
U.S. asset-backed securities issuance is exploding, with more than $7 billion in ABS deals expected in the next several days as issuers wake from the summer lull, putting the market on track for its fourth busiest week of the year, according to Dealogic.
The sales are a test of investor appetite for auto-related bonds that have come at a torrid pace in 2012 as the U.S. car industry continues to be one of the bright spots in the U.S. economic recovery. Investors with few exceptions have gladly gravitated to the assets for their low default rates and additional yield over Treasurys.
The coming ABS offerings include a trio from subprime auto lenders Consumer Portfolio Services Inc., Credit Acceptance Corp. and Exeter Finance Corp., a notable show of dealer confidence that they can easily find buyers for issues backed by loans to borrowers with poor--or no--credit histories.
The $1.8 trillion asset-backed securities market has been one of the most reliable for fixed-income investors this year as they seek returns while Federal Reserve policies compress yields on government debt. In addition to the coupon, investors have seen capital appreciation as risk premiums have declined and the bond ratings have been largely stable.
The downside of the market for the near-term is mainly limited to lurking economic risks, such as Europe's debt crisis. This has led some investors to place a greater value on liquidity as yields fall to levels that make them wince.
"The Fed has made it clear that rates will be lower for longer, and it continues to support risk assets, so fund managers have to make relative value decisions on when, where and if to put cash to work," said Jeffrey Klingelhofer, a portfolio manager at Thornburg Investment Management in Santa Fe, N.M. This means ABS are finding buyers, even as "no one likes spreads as these levels."
Investors, in preparation for the imminent jump in supply, sold more than $1 billion of prime auto ABS last week to free up room for new issues, said analysts at J.P. Morgan Chase & Co.
Despite the selling, risk premiums have been mostly unchanged, with subprime auto ABS spreads even tightening on the week, J.P. Morgan said.
Since the beginning of the year, three-year AAA-rated prime auto yield premiums have narrowed by 0.2 percentage point to 0.1 percentage point over an interest-rate benchmark, according to J.P. Morgan. Three-year-AA rated subprime auto ABS spreads are at about 0.85 point over the benchmark, compared with 1.6 points at the start of 2012.
Mr. Klingelhofer said he prefers prime auto for its liquidity, over subprime where spreads have tightened and may not fairly compensate investors for growing risks.
Despite his concern, the $147 million CPS issue is already close to garnering enough orders for pricing, just hours after its announcement earlier on Monday, according to investors considering the issue via lead manager Citigroup. The Credit Acceptance and Exeter deals are $252 million and $300 million, respectively.
Dealers have sold $140.5 billion of asset-backed securities so far in 2012, led by more than $63 billion in auto ABS, Dealogic data show. Total issuance already exceeds 2011 sales, according to the data provider.
Prime auto deals set for this week include a $1.5 billion issue from a unit of Daimler's Mercedes-Benz and a $500 million deal from insurer USAA. Ford Motor Co. and a BMW finance subsidiary are selling $1 billion and $750 million of loans for car dealer inventory, while Ally is offering $759 million in auto lease ABS.
Finally, a unit of SLM Corp. is selling $1.25 billion of notes supported by government-backed student loans, and PFS Financing Corp. will sell $400 million of debt backed by insurance premiums.
A dollar-denominated U.K. ABS from Santander hasn't yet been formally announced but will likely push the week's sales well over $7 billion, closer to the 2012 record of $9.4 billion set in June, Dealogic data show. An auto ABS from a Huntington Bancshares Inc. unit may also be announced this week, said a person familiar with the deal.
Write to Al Yoon at albert.yoon@dowjones.com
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