First wave of US auto ABS expected to push spreads to new tights
The year's first wave of ABS issuance from auto lenders is expected to get snapped up by investors in the coming days, but rock-bottom yields are pushing some fund managers in search of higher returns in riskier sectors.
With an increase in Treasury yields in recent days, investors are bracing for the usual surge of early-year auto ABS issuance to clear with multi-year tight spreads.
"Honestly, just with every deal that you bring right now as long as it's priced within where the market is, I think it's going to be a food fight," a senior ABS banker said.
General Motors is leading the pack with a US$1.3bn prime auto loan securitization, GMCAR 2021-1, which could be upsized to $1.6bn. Santander is preparing a US$678.3m prime issue, SCART 2021-A next week.
Hyundai seeks to bring a US$1.1bn auto lease transaction, HALST 2021-A, while First Investors is planning a US$231m sub-prime offering, FIAOT 2020-1, in the coming days.
Sub-prime auto lender Arivo is preparing its ABS return, ARIVO 2021-1, since its US$166m debut in 2019.
However, while while the current historic low yield climate and sturdy appetite for ABS has lowered funding costs for car finance companies, some investors have turned cooler on their securitized paper.
They instead favor riskier but higher-yielding asset-backed bonds like those backed by telecom assets and franchise revenues. Otherwise, they are picking lower-rated parts of prime auto deal that offer higher return.
"Spreads have gotten too tight and [we are] seeing the market continuing to reach for yield down the capital stack and into more esoteric securities," said Daniel Oh, portfolio manager at Osterweis Capital Management.
Spreads on auto ABS especially those backed by prime loans are running at multi-year tights due to a relative shortage of overall ABS supply, a rebound in auto sales and a recovery in used car prices during the Covid-19 outbreak.
The average spread on three-year, Triple A rated prime auto ABS is quoted at about 13bp over swaps in the secondary market, well inside a wide of 200bp at the height of pandemic-induced market sell-off in March, according to JP Morgan. The bank's analysts expect that spread to narrow to 10bp in the first half of this year, which would mark its tightest level in the past eight years.
Spreads on sub-prime auto ABS offered marginally wider levels with two-year Triple A spreads averaging 22bp after hitting a wide of 300bp earlier this year, JP Morgan data show. The two-year sub-prime spread may grind to 20bp in the first six months of 2021, within striking distance of the 17bp - which is an eight-year tight for this tenor.
While current auto ABS spreads are not be particularly appealing, investors have little choice as this type of securitized paper is forecast to make up half of the sector's issuance in 2021.
Citigroup analysts said on Thursday they projected auto ABS supply would grow to US$112bn-US$115bn this year from US$104bn in 2020.
"There's so much paper that's yielding nothing," said Peter Kaplan, portfolio manager at Merganser Capital. "It makes it very challenging."