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Eric Gebhard
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This could also be the year for auto lease and floorplan-backed deals to shine.
Eric Gebhard, v.p. and treasurer at
World Omni Finance Corp., said his firm is planning to bring two auto loan and one auto lease transaction to the securitization market this year. He said World Omni, the Deerfield Beach, Fla.-based captive auto finance company of Toyota in the Southeastern U.S., is a frequent auto lease ABS issuer, and that he was encouraged to see an uptick in that sector in 2011. “A number of issuers of lease ABS came to market in 2011 –
Hyundai, Mercedes, Porsche – and it’s good to see that market get more activity,” Gebhard said.
Gebhard added he expects the trend of newer and less-frequent auto lease issuers tapping the securitization market to continue, since the investor pool is deepening as well. “It’s our view that the rating agencies have driven deals to more conservative structures, and those structures are very resilient,” he said. “Investors are realizing it’s an opportunity to pick up some yield without the incremental risk. The new issuers in 2011 broadened the lease ABS market.”
Credit Suisse’s Zucconi said floorplan-backed deals were another part of the auto sector that the market should keep an eye on in the coming year. “Floorplan is a spread relative-value story for 2012,” Zucconi said. “Increased [Original Equipment Manufacturer] profitability, increasing new vehicle sales and careful inventory management has led to increasing dealer profitability.” He explained that floorplan was the type of auto ABS most closely tied to the fundamentals of the manufacturer and dealerships, adding that while floorplan had historically priced wider than loan and lease, these improving fundamentals mean floorplan will be a good relative value buy.
The positive macroeconomic conditions that helped auto ABS make a strong showing in 2011 also look to be on track to continue in 2012. The auto ABS sector got a boost in the second half of 2011 as the ongoing sovereign debt woes in the Eurozone sparked a market-wide “flight to safety.” In September, JPMorgan’s auto team touted the Toyota 2011-2 notes as the first deal able to price at 2007 level tights since the credit crisis, citing the Eurozone volatility as driving borrowers into the deal’s money market tranches. The senior tranches of the Toyota 2011-2 transaction priced at nine basis points over the Eurodollar Synthetic Forward benchmark. If investors see the Eurozone continuing to work through its issues and seek solutions, and if the U.S. continues to be viewed as a safe haven for global investors seeking to avoid Euro volatility, Zucconi said he expects the boost in auto to continue.
The strong bid for auto paper in the second half of 2011 was most clearly seen in the top of the credit curve, he said, but added he thinks the same strong bid will make its way out into subordinated tranches of auto-backed bonds in 2012. “We’ve seen deals coming out this week with front-end tranches subscribed as much as seven times,” Zucconi told SI on Jan. 12. “While demand continues to be more concentrated at the front-end, we’ve seen healthy interest out the curve return as well.”
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Stuart Litwin
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So far, the biggest difference in the crop of primary issuance transactions seen in 2012 has been the new mandatory compliance with the Securities and Exchange Commission’s Rule 193. The rule is a part of Dodd-Frank regulatory reform, and was finalized in the New Year. It requires a depositor review of the receivables pool—or an overall accuracy check on the underlying loans performed by the issuer—to be included in offering prospectuses.
Stuart Litwin, partner at
Mayer Brown, said that while the rule was an added step to the deal process and took some additional time to comply with, he thought that once issuers became used to the rule, they would not find it too onerous. “It’s not a significant drag on the market and it’s not stopping anybody from doing a transaction,” Litwin noted.
Zucconi said Dodd-Frank and other wide-ranging financial regulatory reforms should not be a game changer for auto ABS. “Our market has been fairly resilient to the various provisions coming out of Dodd-Frank and other pieces of legislation,” he said. There was concern that the SEC’s Rule 193 would be a small damper on the market, especially for issuers without a deep bench. But auto deals have complied fairly easily so far in 2012. “We’re working with external counsel to get fully up to speed,” Gebhard said. “As any issuer will tell you, it feels like it’s more paperwork than is creating value for the investor,” he noted. But he said he did not think the rule would not be putting the brakes on any new deals.