High Demand Single-B Bond Ratings Show Stability, According to Rating Agencies

MIAMI — Investor demand for single-b rated bonds and willingness to issue these bonds will continue to grow, a group of senior managing directors from Kroll Bond Rating Agency, told Auto Finance News at ABS East.

Although single-b bonds don’t allow much room for error, there is demand out there from investors, and issuers are happy to oblige for specific reasons. 

“[Lenders] can get more off their books, more leverage with [single-b bonds],” said Brian Ford, senior director of Kroll Bond. “You have this supply and demand.”

Year to date, S&P Global Ratings has rated $317 million in the single-b auto paper, and that exceeds all prior years from 2007 through 2017 combined, according to Amy Martin, S&P Global Ratings’ sector lead in U.S. Auto ABS.

Though there is quick growth in these speculative-grade deals, they still make up only a small portion of the overall securitization volume — and there are signs of strength in the secondary market, which includes high investor demand, flat YoY vehicle sales, improving vehicle values, higher loan origination volume, and tightening subprime credit, Martin said during a webinar.

What makes single-b bonds attractive is the structure of lower tranches, which has the ability to “de-level” quickly, or immediately pay off existing debt from a lenders balance sheet, said Rosemary Kelley, senior managing director of Kroll Bond.

“Issuers are relatively comfortable with the consumer, and the question is the stability over time even with subprime,” Kelley said. “The [short term] structure has helped to mitigate the risk for issuers.”

Besides issuers accommodating to what their investors are demanding, the subprime space appears to be in a good place, according to Fitch Ratings Agency.

Fitch only rates two subprime securitizations, Santander’s and AmeriCredit, which are both very solid, Hylton Heard, senior director of structured finance, told AFN.

“The negative outlook we had [anticipated for subprime] this year hasn’t materialized,” he said. “The two [subprime] names we rate have been incredibly consistent and stable in terms of new and used vehicles, loan to value, and credit scoring,”

The only cause for concern he noted, would be seeing a big bank or captive start to chase volume. However, he anticipates the “big names aren’t going to move down-spectrum to chase growth,” he said. 

The subprime transactions that Fitch rates have not had a single-b bond, but, “if we were presented, we’d do it,” Heard said, noting that there are not any negative signs for single-b bonds to cause worry.

Credit has tightened, and there’s not a ton of differentiation down the credit tier of deals. Specifically, the basis point difference between the high-quality notes and riskier deals has compressed. The difference between AAA and BBB is 60 basis points today, compared with a 200 basis point spread back in 2016, Ford said. 

“So as spreads have tightened investors have had to move further down in credit to find attractive yields,” he added. In light of tightening spreads, investors have been forced to go down in credit to find attractive yields.  Ford said.

Furthermore, it continues to be important that lenders stay disciplined on credit underwriting, Kelley said, “particularly since it continues to be a competitive environment for subprime auto issuers.  Also, it will be important to monitor any changes in the performance of this segment as a result of changes in the market such as the increase in  interest rates.”

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