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April 5, 2013 8:10 pm
Sales of securities backed by pools of risky car loans have accelerated in past weeks as investors are snatching up the higher yielding bonds that were popular in the build-up to the financial crisis.
Since mid-March more than $2bn in deals that bundle car loans made to subprime borrowers have hit the US debt capital markets, pushing this year’s total sales to $7.3n. Issuance of subprime auto debt is now up about 60 per cent from the same period of 2012, according to Deutsche Bank.
The jump in deals backed by subprime auto loans comes as car sales are picking up and as benchmark interest rates remain at historic lows. That has encouraged a growing number of investors to buy assets tied to lower credit loans.
“Borrowers are getting more creative with the bond deals and investors are reaching out to higher risk products,” said Michael Collins, a senior investment officer at Prudential Fixed Income.
Demand for the securities started to rebound late last year as car sales rose and average yields on corporate debt fell to record lows.
But in recent weeks, auto debt issuers, including Santander Drive Auto Receivables Trust and Hyundai Auto Receivables, have finalised large deals in offerings that were largely oversubscribed, people familiar with the sales said.
“The word ‘subprime’ was tarnished after the crisis, but fundamentals in the auto market are very good and this portion of the asset-backed market seems really stable for now,” said Mr Collins. “The subprime stigma has faded a bit.”
Investor demand for the bonds is already being reflected in increased financing options at dealerships. Last year, more than 6m borrowers with weak credit histories applied for car loans, according to data by Equifax. That helped propel annualised car sales 4.7 per cent higher in March, to 15.6m vehicles.
US carmakers, including General Motors and Ford Motor, estimate that demand for cars and trucks will stay resilient in 2013. As a result, sales of total auto subprime asset-backed securities may climb to as high as $25bn, up from $18bn in 2012, according to Deutsche Bank estimates.
Falling delinquency rates and stable used car values – which boost recovery rates on defaulted debt and ease losses for bondholders – have also helped lift subprime auto debt recently.
However, fund managers say the securities’ popularity has yet to reach levels that point to the looser underwriting standards common in the build-up to the financial crisis.
“The auto industry has a unique set of drivers and for now, much of the activity in the subprime auto market seems to be just a normalisation,” said David Goodson, head of securitised products at ING US Investment Management. “But one has to be very selective and disciplined with subprime assets.”
Demand for the securities in the secondary market has also been solid. The Barclays ABS (auto) index shows spreads tightening to 0.55 basis points over similar swaps, compared with 0.79 basis points a year ago.
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