Repackaged auto loans seem like an unlikely place for mauled credit investors to hide, but they are outperforming and issuance is at a multi-year high.
Corporations have sold more than $58 billion of asset-backed securities supported by auto loans this year, about 20% more than at this point in 2021. Santander Consumer and First Help Financial both offered deals this week, while Carvana Co. — the online used car seller whose shares and junk bonds plunged — plans to sell $605 millon of the debt next week.
“Auto ABS is one of the safe havens in structured credit now,” said Tracy Chen, portfolio manager at Brandywine Global Investment, in a phone interview.
Asset-backed securities can get clobbered during an economic downturn, as consumers get laid off and default on their debt. During the financial crisis, the securities got hit particularly hard as the housing bubble popped and bonds tied to debt including second mortgages and home equity loans headed south.
But auto loan debt is ultimately backed by cars, including loans made to subprime borrowers. Prices on both new and used vehicles are up with prices on both new and used vehicles up 14% over the last year thanks in part to shortages of chips, according to US consumer price index data and the Manheim index. Used car prices have been falling in recent months, but new vehicle prices are still rising.
In addtion, the bonds typically mature within a few years, and with unemployment at just 3.6%, investors are willing to bet that consumers will keep paying their loans in the near term.
The highest-rated, AAA, bonds that most investors buy have safeguards built into them, such as lower-rated portions that are the first to absorb losses.
“It has a short tenor with fast delevering, it’s well enhanced, and the used car prices are still supportive, despite the recent normalization,” Brandywine’s Chen said.
Auto asset-backeds broadly have fallen just 2.6% this year through Thursday after accounting for price movements and interest payments, while high-grade corporate bonds have lost nearly 13%, according to Bloomberg index data.
Even so, companies are paying more to borrow, as inflation rages and the Federal Reserve hikes rates. Santander Consumer’s latest deal featured a AAA rated portion, the A-2 securities, that finishes payments in March 2025 and yields 2.78%. In February, a similar security yielded 1.37%.
And there are early signs that risk is creeping higher for the bonds. Borrower delinquencies edged higher in February from the same month last year, according to an April 8 note from S&P Global Ratings. Subprime borrowers could increasingly struggle to make their payments in the coming months as they deal with the highest inflation in 40 years.
These risks seem manageable to many analysts and investors, in part because many consumers still have pandemic savings to dip into if they have to, and bonds have ample protections for investors.
“The market is not crashing, it’s normalizing,” said Alin Florea, auto ABS strategist at Barclay Plc, in a phone interview.
Elsewhere in credit markets:
Twitter Inc. bonds fell after Elon Musk tweeted that his $44 billion takeover of the social media giant is “temporarily on hold” as he waits for more information about spam and fake accounts on the site.
- Bombardier Recreational Products withdrew a $500 million leveraged loan due to unfavorable market conditions, according to a person with knowledge of the matter who isn’t authorized to speak publicly and asked not to be identified
- KKR & Co. is picking its way through battered U.S. bond markets to buy credits opportunistically, while anticipating more tumult ahead
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
Around $20 billion of European junk debt linked to more than a dozen deals is still sitting on lenders’ balance sheets, as bankers agonize over when and how to sell it on to investors, with the region’s credit markets deeply unsettled by low growth, inflation and war.
- Wm Morrison Supermarkets Plc, William Hill Ltd. and ekaterra — Unilever Plc’s tea business — are among the billion-dollar-plus deals that have yet to be sold on, with most bankers waiting for a period of stability before launching
- CVC Capital Partners sold bonds backing its investment in Spanish football league LaLiga at a substantial discount, in a sign of how challenging debt markets remain for junk-rated corporates
Major developer Sunac China Holdings Ltd. made a local bond payment, shortly after it announced a dollar-note default, the latest example of cash first going to ailing builders’ domestic creditors.
- Borrowers returned to Asia’s primary dollar bond market this week after a holiday-fueled lull, with Chinese issuers pricing most of the offerings
- Thailand will shield its government borrowing plan from surging bond yields by tweaking the mix of short- and longer-term debt instruments it issues
- Regulatory headwinds and economic uncertainties weighing on China’s technology stocks have also hit the sector’s dollar bonds, a selloff that has some credit investors upbeat on future performance
–By Carmen Arroyo and Charles Williams (Bloomberg)