Bonds backed by auto loans are selling at the fastest pace in years
(Bloomberg) – Refurbished auto loans seem like an unlikely place for mutilated credit investors, but they are outperforming and issuance is at a multi-year high.
The companies have sold more than $58 billion in asset-backed securities backed by auto loans this year, about 20% more than at this point in 2021. Santander Consumer and First Help Financial have both offered deals this week, while Carvana Co. — the online used-car seller whose junk stocks and bonds have plunged — plans to sell $605 million of debt next week.
“Auto ABS is now one of the safe havens in structured credit,” Tracy Chen, portfolio manager at Brandywine Global Investment, said in a phone interview.
Asset-backed securities can take a beating during an economic downturn as consumers are laid off and fail to repay their debt. During the financial crisis, securities were particularly hard hit when the housing bubble burst and debt-related obligations, 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 for new and used vehicles are on the rise, with new and used vehicle prices up 14% year-on-year, in part due to chip shortages, according to data from the consumer price index in the United States and the Manheim index. Used car prices have fallen in recent months, but new vehicle prices continue to rise.
Additionally, bonds typically mature within a few years, and with an unemployment rate of just 3.6%, investors are willing to bet that consumers will continue to repay their short-term borrowings.
The highest-rated, AAA bonds that most investors buy have built-in safeguards, such as lower-rated parties that are the first to absorb losses.
“It has a short duration with rapid deleveraging, it is much improved, and used car prices are still favorable, despite the recent normalization,” Brandywine’s Chen said.
Auto asset-backed assets fell just 2.6% overall this year through Thursday after factoring in price movements and interest payments, while investment-grade corporate bonds fell lost nearly 13%, according to data from the Bloomberg index.
Even so, companies are paying more to borrow, as inflation rages and the Federal Reserve raises rates. Santander Consumer’s latest deal featured a AAA-rated portion, A-2 securities, which ends payouts in March 2025 and yields 2.78%. In February, a similar stock returned 1.37%.
And there are early warning signs that the risk is rising for bonds. Borrower delinquencies rose slightly in February from the same month last year, according to an April 8 note from S&P Global Ratings. Subprime borrowers could find it increasingly difficult to make their payments in the coming months as they face the highest inflation in 40 years.
These risks appear manageable to many analysts and investors, in part because many consumers still have pandemic savings to dip into if they have to, and bonds provide ample protection for investors.
“The market is not collapsing, it is normalizing,” Alin Florea, automotive ABS strategist at Barclay Plc, said in a phone interview.
Elsewhere in the credit markets:
Twitter Inc. bonds fell after Elon Musk tweeted that his $44 billion takeover of the social media giant was “temporarily on hold” pending 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 is not authorized to speak publicly and asked not to be identified.
- KKR & Co. is forcing its way through struggling US bond markets to buy credit opportunistically, while anticipating more tumult to come
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Around $20 billion in European junk debt tied to more than a dozen deals still sits on lenders’ balance sheets, as bankers grapple with when and how to resell it to investors as the region’s credit markets run deep. disrupted by low growth, inflation and war.
- Wm Morrison Supermarkets Plc, William Hill Ltd. and ekaterra – Unilever Plc’s tea business – are among the billion-plus deals that have yet to be sold, with most bankers waiting for a period of stability before jumping in.
- CVC Capital Partners has sold bonds backing its investment in Spanish football league LaLiga at a substantial discount, a sign of the difficulty in debt markets for poorly rated companies
Lead developer Sunac China Holdings Ltd. made a local bond payment, shortly after announcing a dollar default, the latest example of cash going first to domestic creditors of struggling builders.
- Borrowers returned to Asia’s primary dollar bond market this week after a holiday-fueled lull, with Chinese issuers pricing most deals
- Thailand will protect its public borrowing plan against soaring bond yields by adjusting the mix of short- and long-term debt instruments it issues
- Regulatory headwinds and economic uncertainties weighing on Chinese tech stocks have also hit the sector’s dollar bonds, a selloff that has some investors optimistic about future performance.
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