Bond offerings tied to automobile loans and leases are poised to dominate sales of asset-backed debt for a third straight year in 2011 after issuance of all types of the securities plunged 31 percent in 2009.
Vehicle debt bundled into securities will likely total from $70 billion to $75 billion, up as much as 23 percent from 2010, as auto sales rebound from a 27-year low, according to Barclays Capital. Bond sales linked to auto and education loans, and credit cards may reach $115 billion in 2011, Barclays said.
Total issuance fell to $92 billion this year from $134 billion as banks relied more heavily on deposits to fund credit card lending and the Federal Reserve ended its Term Asset-Backed Securities Loan Facility, which financed investors buying asset- backed securities.
“The auto finance companies continue to originate good volumes of new loans,” Brian Wiele, a managing director at Barclays in New York, said in a telephone interview. “They are not banks, and securitization offers attractive funding.”
Automakers are tapping the so-called asset-backed bond market as they anticipate car and truck sales reaching 12.8 million next year. Dearborn, Michigan-based Ford Motor Co., the only one of the three Detroit-area automakers that didn’t take government aid during the financial crisis, was the biggest ABS issuer in 2010, Barclays data show, offering $9.8 billion.
Bond Spreads
More than 66 percent, or $61 billion, of this year’s asset- backed securities sales were connected to automobile debt.
Top rated securities linked to auto loans yield 56 basis points, or 0.56 percentage point, more than Treasuries , according to Bank of America/Merrill Lynch data. That compares with relative yields of 193 basis points for bonds backed by student loans and a spread of 68 basis points for credit cards.
Spreads for auto-backed debt narrowed 25 basis points from Dec. 31, 2009 through Dec. 24, the Bank of America index shows. Spreads for asset-backed securities linked to student loans shrank 3 basis points to 193, while bonds tied to credit card payments saw their relative yields contract 24 basis points.
Elsewhere in credit markets, corporate bond sales worldwide total $3.18 trillion this year, down from $3.877 trillion in 2009. The extra yield investors demand to own company debt instead of Treasuries finished last week at the lowest in a month. Prices of leveraged, or speculative-grade, loans rose for a third week, while emerging-market debt spreads narrowed.
Credit-Default Swaps
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.78 basis points to a mid-price of 85.53, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and declines as it improves.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The extra yield investors demand to own corporate bonds worldwide instead of similar-maturity government debt was unchanged at 166 basis points, or 1.66 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 4.2 percent.
Corporate bonds have lost 1.01 percent in December, trimming this year’s gains to 6.81 percent, including reinvested interest. That compares with 3.42 percent for the firm’s Global Sovereign Broad Market Plus Index and 11.9 percent for the MSCI World Index of stocks, including reinvested dividends.
Loans Rally
The S&P/LSTA U.S. Leveraged Loan 100 Index ended Dec. 23 at 92.55 cents on the dollar, up from 87.68 cents on the dollar at the end of 2009. The index, which reached as high as 92.9 cents in April, tracks the 100 largest dollar-denominated first-lien leveraged loans.
In emerging markets, the extra yield investors demand to own corporate bonds rather than government debt shrank 14 basis points to 240 basis points as of Dec. 24, according to JPMorgan Chase & Co. index data. Spreads have ranged from as wide as 346 basis points in May to as narrow as 219 this month.
Sales of bonds tied to consumer and small-business loans plummeted 42 percent in 2008 as lending shriveled during the credit crisis, according to data compiled by Bloomberg.
The Fed’s Term Asset-Backed Securities Loan Facility, or TALF, helped revive sales temporarily by lending to investors seeking to buy asset-backed bonds. The program lasted from July 2009 through March.
Credit-Card Slump
While TALF bolstered the market, sales of asset-backed debt tied to household borrowing are falling primarily due to an 85 percent drop in sales of bonds tied to credit card payments, according to a Dec. 13 Barclays report.
Financial Accounting Standards Board rules that took effect in January require banks to hold loans that were bundled and sold to investors on the balance sheet, meaning they have to maintain capital against the debt.
Credit card companies are also enjoying cheaper funding from deposits, said the New York-based analysts at Barclays led by Joe Astorina.
“A majority of issuers are banks flush with deposits,” said Barclay’s Wiele. “Banks incentives to securitize credit cards aren’t what they used to be.”
Prices on bonds linked to credit-cards may get a temporary boost as supply remains muted before demand wanes, said James Grady of Deutsche Asset Management.
‘Orphan Sector’
“At some point this becomes an orphan sector,” said Grady, a managing director in New York at the firm, which manages $240 billion. “There will be less liquidity, and it can’t have a meaningful impact large investors’ portfolios.”
Issuance of securities tied to student borrowings fell to $17.8 billion in 2010 from $20 billion the previous year as the U.S. government eliminated the Federal Family Education Loan Program. The change cut private lenders out of the market for originating government-guaranteed loans, slashing the volume of debt available for companies to package into bonds, according to Barclays.
Sales will be between $12 billion and $15 billion in 2011, Barclays analysts said in the report earlier this month. Issuance of so-called esoteric asset-backed securities, or bonds tied to unusual or riskier assets, are set to climb in 2011, according to Barclays’ Wiele. Barclays and Morgan Stanley sold $253.75 million of bonds tied to revenue from billboards operated by Adams Outdoor Advertising LP on Dec. 3, Bloomberg data show.
“The market has recovered to the point where people are willing to look at these transactions and consider the risk and reward,” he said. “As spreads have tightened on other assets, investors have to look beyond those assets for yields.”
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