Subprime auto bonds still very much in vogue

3 min read
Americas
Joy Wiltermuth

Bond investors continued to show strong interest this week for new subprime auto loan bond deals despite increasing alarm about a rising tide of missed car payments.

The New York Federal Reserve flagged the near six million US borrowers with distressed subprime auto loans as a “significant concern” in a November report.

And in January, late payments of more than 60 days past due reached 4.49% for subprime borrowers with car loans, or the highest rate in eight years, according to Morgan Stanley research.

But even with mounting worries around potential pain to come, the appetite for auto bonds backed by borrowers with shaky credit has been growing.

A big driver appears to be a sense that investors have enough reliable data about the individual performance of the industry’s varied car finance platforms to pick winners.

“Investors continue to purchase this product,” said one auto ABS banker selling a subprime deal this week.

“They don’t just look at headlines. They are looking at a very specific pool of assets.”

DEFYING EXPECTATIONS

Deep subprime shop American Credit Acceptance was able to get its new US$209m deal done at about 155bp on a weighted average spread basis - or its lowest asset-backed bond print in years, the banker said.

It pooled mostly used car loans to borrowers with low 544 FICO scores paying rates at a 22.77% average, according to S&P.

The tightening defied expectations of Bank of America Merrill Lynch analysts who earlier this month said the year’s risk-on rally in subprime auto ABS had likely played out.

“We believe further spread tightening … is limited with losses on the underlying collateral expected to see modest increases,” the analysts wrote on February 10.

DUG IN

But the print on ACA’s 2.23-year Single A, nonetheless, came at 125bp over interpolated swaps on Tuesday, whereas its previous low on similar bonds was 165bp in March 2013, the banker said.

“Ultimately, subprime autos was one of the sectors that performed well in the crisis,” another ABS banker told IFR.

“There is a lot more credit work up front, but investors love the yield pickup.”

Even with ACA’s latest tight print, its 3.53-year Double B bond priced to yield 5.5%, versus 5.9% on its prior bond in November, according to IFR data.

Santander Consumer USA similarly was experiencing high demand for its new US$1.023bn subprime auto ABS from its large and liquid DRIVE program.

The deal - expected to launch on Thursday - bundled loans to borrowers with higher 609 average FICO scores than ACA’s deal and at lower 15.73% average interest rates, according to S&P.

All of its seven tranches were already full or oversubscribed on Tuesday when bankers started testing tighter levels, according to investors.

Orders for the US$148.83m 2.81-year Aa3/A class, for example, reached almost US$600m on Tuesday, after which time price talk was pulled in to the 95bp area over interpolated swaps from the 100bp-105bp area.

“ABS spreads are close to post-crisis tights, and it appears they have the potential to go tighter, in our opinion, absent some macro event,” Wells Fargo analysts said on Tuesday.

“The question now is what might change the direction of the market.”