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Bondholders Embrace Weakest Consumers for Yield: Credit Markets

Two years after the bankruptcy of Lehman Brothers Holdings Inc. caused credit markets to freeze, investors are embracing bonds backed by loans to consumers with weaker credit scores as yields approach all-time lows.

AmeriCredit Corp., the lender to car buyers that’s being purchased by General Motors Co., sold $850 million of bonds tied to auto loans in its largest sale in three years after increasing the offering by $150 million. Securities linked to loans to consumers with credit considered subprime account for 20 percent of asset-backed auto debt issuance this year, double the share in 2008 and 2009, according to Deutsche Bank AG.

“It is all about the incremental yield,” said Dan Castro, head of structured finance analytics and strategy at broker-dealer BTIG LLC in New York. “Mainstream auto won’t get you there.”

Issuers have sold $4.4 billion of bonds tied to subprime auto loans this year, more than double the amount arranged in 2009, according to data compiled by Bloomberg. While sales plunged during the housing crisis of 2007 and froze after Lehman suffered the biggest bankruptcy in history, investors are now snapping up similar securities attracted by their yield.

One of the top-rated portions of AmeriCredit’s offering that matures in about two years yields 45 basis points more than the benchmark swap rate, compared with a premium of 18 basis points on similar-maturity debt tied to prime borrowers from Nissan Motor Co., Bloomberg data show. GM, the automaker that’s 61 percent owned by the U.S., agreed to buy Fort Worth, Texas- based AmeriCredit in July for $3.5 billion.

‘Riskier Names’

“We are looking at some of the riskier names,” said Jeffery Elswick, director of fixed income at Frost Investment Advisors LLC in San Antonio, with $6.5 billion in assets under management.

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt was unchanged at 172 basis points, or 1.72 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.564 percent, up from 3.533 percent.

Yields on corporate bonds worldwide declined to a record 3.442 percent on Aug. 24, Bank of America data show, as two-year U.S. government debt also fell to an all-time low.

Hertz Global Holdings Inc., the world’s biggest rental car company, plans to sell $300 million of eight-year notes through its Hertz Corp. unit, according to a person familiar with the transaction. Hertz, based in Park Ridge, New Jersey, may issue the bonds as soon as today, said the person, who declined to be identified because terms aren’t set.

Credit Swaps Rise

Proceeds may be used to fund a portion of the cash consideration for the purchase of Tulsa, Oklahoma-based Dollar Thrifty Automotive Group Inc., and for general corporate purposes, Hertz said today in a statement distributed by Marketwire.

Benchmark indicators of corporate credit risk rose in the U.S. and Europe to the highest since Sept. 8.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 1.21 basis points to a mid-price of 104.97 basis points as of 12:27 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.5 to 107.08.

‘Caution is Warranted’

The indexes typically rise as investor confidence deteriorates and decline as it improves. Credit-default 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 investments.

Top-rated asset-backed securities linked to auto loans are yielding about 47 basis points more than Treasuries, the lowest spread since April 23, according to Barclays Plc data.

“Caution is warranted as yields grind in,” said Ronald Thompson Jr., head of asset-backed securities strategy at Knight Libertas LLC in Greenwich, Connecticut. “The enthusiasm for a number of deals that have come recently is compelling, but I think we might be getting a little bit ahead of ourselves in the current economic environment.”

AmeriCredit has sold $2.45 billion of the bonds this year, Bloomberg data show. The offering yesterday was the largest since the company issued $1 billion of securities tied to primarily prime and near-prime borrowers in October 2007, a month after raising $1 billion of debt linked mostly to subprime auto loans, according to the company’s website.

“The level of interest from investors in the capital markets is very supportive of our growth,” said Caitlin DeYoung, a spokeswoman for AmeriCredit. “The favorable funding environment helps us from a volume perspective.”

More Comfortable

Bondholders have become more comfortable with subprime auto debt as used cars hold their value, said Adam Steer, an analyst at research firm CreditSights Inc. in New York. Subprime lending is offered to individuals who don’t qualify for prime rate loans. Prime borrowers must meet certain criteria on a credit-scoring system to prove their creditworthiness.

“If the cars are holding up in value you are lending against a less risky asset,” he said. The Manheim Used Vehicle Index has risen 21 percent since December 2008, and touched a record high in May.

Delinquency Rate

The 30-day delinquency rate for auto loans for borrowers with all types of credit has also improved, falling to 2.89 percent in the second quarter from 3.07 percent in the same period of 2009, according to a report yesterday from Deutsche Bank, citing data from credit service Experian.

Munich-based Bayerische Motoren Werke AG yesterday sold $1 billion of bonds backed by automobile leases after increasing the issue from $750 million. DriveTime Automotive Group Inc., a Phoenix-based company that finances cars and trucks for borrowers with lower credit, is marketing $228 million of asset-backed securities.

“There’s so much cash, they’re putting it to work in what they would consider to be defensive investments,” Richard Gordon, managing director and fixed-income market strategist at Wells Fargo & Co., said in a telephone interview from Chicago. “The longer that we stay in an ultra low-yield environment, the more the level of systemic risk increases.”

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