Sunday, 23 September 2018

Driven to the brink

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The German auto asset-backed securitisation market had been the last bastion of primary supply in Europe until the collapse of Lehman Brothers closed the market. Since then auto makers have explored, with measured success, alternative funding routes. But with vehicle sales likely to fall amid increasing consumer pressure, the outlook for publicly placed ABS deals looks challenging. William Thornhill reports.

German car maker VW had been at the forefront of the European securitisation market last year. It issued several public and privately placed transactions, with the last public placement – Driver 6 – seen just a week before the collapse of Lehman Brothers.

In hindsight, the timing of that deal could not have been better for the issuer. At the time, the head of ABS at VW Bank, Stefan Rolf, confirmed that all proceeds of Driver 6 had been placed with third-party investors, with none retained.

Loyal German accounts took slightly more than usual, their participation rising from half in Driver 5 to around two-thirds. "German investors are generally more comfortable with German collateral and a well-established programme that they are familiar with," Rolf said at the time. These accounts came in pretty early, bringing momentum to the book from its open, he said.

The balance of interest was made up by UK accounts and, more unusually, longer-term French asset managers and funds. There were also a handful of new names, which may have been attracted by the spread levels on offer, which were sumptuous relative to tight pre-crisis levels.

The €936m Triple A rated A Class with a 1.92-year WAL priced at one-month Euribor plus 90bp and the A+/A1/A+ rated B Class with a 2.35-year WAL priced at plus 170bp over the same benchmark. In pre-crisis times Triple A debt had offered a spread pick up in the low single digits and Single A debt in the high teens.

At the time, Damian Saunders, from the syndicate at lead manager BNP Paribas, said there were still a sizeable number of buyers who were sidelined, awaiting an improvement in market conditions.

But that improvement never came. As Driver 6 was pricing, both Renault's RCI Banque and Ford's FCE Bank had been soft marketing their respective auto securitisations. When it became clear liquidity had completely dried up, public placement was no longer a funding option for them.

From that point on retained auto securitisations were the order of the day in Germany and across the rest of Europe. RCI Banque had initially planned to place its transaction publicly via Citigroup, and thought it would be able to do so hot on the heels of Driver 6. It returned to the market two months later in November 2008, pricing and retaining Cars Alliance Auto Leases Germany FCT, an ABS backed by German auto leases of up to €1.3bn.

At the same time, Ford's FCE Bank priced and retained Globaldrive Auto Receivables 2008-B, Santander Consumer Bank issued and retained SC 2008-2 and VW bank issued and retained its Private Driver 2008-2, 2008-3 and 2008-4 deals, all sized at around €1bn each. In fact, since September 2008, Private VCL 2008-1 has proved to be the only European deal that managed to be even partially placed.

Bankers have concluded that, if even the strongest name in the market and the only consistent European issuer since the beginning of the crisis could not bring a deal, the omens were pretty poor for the multitude of other potential issuers.

Apart from RCI Banque, which inaugurated its German series with Cars Alliance Auto Germany 2007-1 in October 2007, there was BMW's Group Financial Services bank that last issued in July 2007 with its Bavarian Sky, Daimler Chrysler Bank which had last issued off its Silver Arrow programme at the end of 2006; and Porsche Bank which had been actively issuing off its FACT series, the last being seen in 2006.

Broadening funding options

The fact that there have been no genuine publicly placed and broadly marketed ABS deals in Europe since September 2008 has driven home the message that the survival of auto makers largely depends on their ability to broadly diversify their funding lines.

"In difficult markets it is important to have a well diversified funding basis so you can tap one or the other or a combination, rather than depend exclusively on securitisation or any other instrument," said VW Bank's Rolf. He declined to comment over the bank's 2009 funding need, but confirmed that it is in a comfortable situation.

In the absence of a functioning securitisation market, VW Bank has been particularly successful in structuring private placements and expanding its retail deposit base. The bank had around €12.7bn in retail deposits at the beginning of the year. Since then these have grown to more than €16bn. "People are coming to VW Bank because of the government guarantee and the fact that we are a household brand name that people can trust and that they like," Rolf said. The bank is rated one notch above the parent's A-/A3 rating.

This year VW Bank priced and retained VCL 09-01. It is working on a number of international projects where it is expected to roll out securitisations in other regions – though whether any of these come to fruition depends entirely on the state of the market. The US auto securitisation market, for example, has been particularly vibrant, contrasting sharply with Europe. VW, along with many other players, played an active role by issuing two US deals last year: the US$1bn VALET 2008-2 in December 2008; and seven months earlier the VALET 2008-1, which got a blow-out reception.

Other German auto securitisers are now relying largely on a combination of private placements and conduit funding. ABCP conduit facilities are particularly well suited, taking raw auto-loan collateral. In some cases these facilities will build to a level where they are large enough to be termed out. But whether the final exit is placed or retained is at the moment still open to question.

To a large extent public placement depends on the securitisation market making a return, and with spreads where they are and economic fundamentals deteriorating by the day, success in the public arena looks remote.

Such is the concern that securitisation might become a permanently tainted asset class that some key players in Germany are now considering a radical legislative programme. Hartmut Bechtold, managing director of the True Sale Initiative – a platform set up in spring 2003 by Allianz, Commerzbank, Deutsche Bank, Dresdner Bank, DZ Bank, HVB and KfW, although others subsequently joined – recently acknowledged that excesses in the US had undermined the German ABS market.

Two issuers are considering public ABS sales worth more than €1bn this year, according to Bechtold, but these could be put back until the autumn, and he recommended that the German government pass a new securitisation law to effectively unify all the various existing domestic rules. He argued that such a measure would help restore confidence, at least with German investors.

The creation of a German named brand – particularly one that avoids use of the word securitisation – could help instil confidence among local, and perhaps international, investors. It could also give issuers a competitive advantage.

For now the outlook remains mixed, particularly in the auto market where the deals of some ailing manufacturers have been downgraded. In December last year several of Ford's European auto deals, including some of its most recently issued ones, suffered that fate when Moody's downgraded the Triple A notes to Double A territory. The agency was particularly concerned about back-up servicing arrangements, along with the high proportion of balloon loans that backed certain FCE Bank deals.

But it has not all been one way. Fitch recently raised the ratings on VW Bank’s auto-loan backed ABS Driver 2 GmbH and Driver 4 GmbH’s Class B notes to AA– (from A+). The rating action reflected good deal performance and a considerable increase in the levels of credit enhancement as the transactions de-leverage, so building subordination. Driver 2 and 4 have 27.8% and 49.2% of rated notes outstanding. The ratings on the remaining notes in Driver Series 2 to 6 inclusive were affirmed.

In a separate report published in September last year, S&P raised concern that Europe was showing signs of weaker economic conditions and lower sales. It expected "pressure on all global automakers will persist through 2008 and probably well into 2009," it said. A global slowing of auto sales is expected to reduce cash generation for all automakers, though the agency admitted that the higher rated foreign automakers "will not be as severely affected".

The German market saw stable growth in the first half of 2008, with new car registrations up 2.9% on the same period of the previous year, following a 9.2% decline in the full year 2007. But despite the relatively strong underlying economy and increasing replacement demand, S&P warned that uncertainty about future CO2 emissions regulation could lead to "customers to postpone car-buying decisions", in Germany in particular.

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