Bayview lands auto credit-linked note
Bayview Asset Management issued on Wednesday a US$315.81m floating-rate credit-linked note referencing a portfolio of car loans originated by Huntington, a regional US bank.
The issuance, Bayview's first auto credit-linked offering, was connected to a synthetic credit risk transfer deal struck last December between the asset manager and Huntington on the lender's US$2.8bn auto loan pool, a person familiar with the deal said.
US banks are increasingly seeking capital relief through credit risk transfer techniques in anticipation of tougher capital rules as a result of the so-called Basel endgame, which is slated to go into effect next year. Huntington's auto credit risk transfer with Bayview reduced the bank's risk-weighted assets by US$2.4bn.
But the structure of this deal, in which the protection provider then issues credit-linked notes to other investors, is more complex than most typical credit risk transfer transactions, in which credit-linked notes are issued directly by the bank to the investor providing the protection.
For Bayview, the CRT transaction brought exposure to attractive income-generating assets, while the issuance of credit-linked notes offered protection from losses, an industry source said.
Huntington bought protection against higher-than-expected losses on the vehicle loans in the form of a tranched credit default swap from Bayview, according to Moody's. The CDS protects about 12.5% of the total US$2.8bn loan pool.
Credit-linked notes were then issued through a special purpose vehicle named Bayview Opportunity Master Fund VII 2024-CAR1. Principal payments on the credit-linked notes will come from a cash collateral account, which holds the money raised by issuing the notes, while interest payments are supported by the 7.5% annual premium being paid monthly by Huntington for the protection.
Up to five months of missed premium payments are covered by a letter of credit from the Federal Home Loan Bank of Cincinnati, Moody's said. Santander uses a similar structure, with a cash collateral account and letter of credit, for its auto credit-linked notes, the ratings agency noted.
The Bayview transaction also benefits from excess spread that can be used to cover losses, unlike bank-issued CLN deals.
Amid strong investor interest in credit risk transfer securities, Bayview's biggest tranche was a US$188.38m Triple A rated Class A note. It cleared at SOFR plus 110bp, which was tighter than guidance of plus 120bp–125bp. It carried a weighted-average life of 1.51 years.
Morgan Stanley and Bank of America were the joint bookrunners.