Auto Revival Sways Traders in Surging Bond Sales: Credit Markets

Auto Revival Sways Traders in Surging Bond Sales
General Motors Co. reported the largest annual profit in its 103-year history. Photographer: Jeff Kowalsky/Bloomberg

Automakers are selling bonds linked to vehicle debt at the fastest pace since at least 2008 as soaring investor demand sends relative yields on the notes to the lowest level in more than six months.

Issuance of auto asset-backed securities has reached $14.8 billion this year, compared with a range of $7 billion to $9 billion in the comparable periods of 2008 to 2011, according to data from Barclays Capital. Nissan Motor Co., Honda Motor Co. and Ford Motor Co. sold $5.5 billion of bonds this month, boosting the offerings by at least 35 percent, in their biggest deals in as many as seven years.

Bond buyers are fueling the deals as the lowest U.S. unemployment rate in almost three years drives car sales and as European leaders agreed to a second bailout for Greece, averting a potential global credit crisis. Relative yields on AAA rated auto asset-backed bonds have declined to 67 basis points, the lowest since Aug. 1, from last year’s high of 97 basis points in November, Bank of America Merrill Lynch index data show.

“With some of the concerns over Europe starting to ease a bit, people are less cautious,” said Brian Wiele, a managing director at Barclays Capital in New York. “We are seeing a lot of that cash coming into our market.”

Sales of asset-backed securities tied to auto loans account for 58 percent of about $25.3 billion of asset-backed issuance this year, according to the firm.

Low-Cost Funding

The asset-backed market is providing automakers with low-cost funding for lending to customers, potentially spurring more business, according to Wells Fargo Securities LLC. The rates may aid parts of the market where the Federal Reserve’s program to boost borrowing “may have fallen short,” analysts led by John McElravey in Charlotte, North Carolina, wrote in a Feb. 17 report.

Elsewhere in credit markets, a benchmark gauge of U.S. company credit risk declined to the lowest level in a week, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing by 1.4 basis points to a mid-price of 97.2 basis points as of 11:11 a.m. in New York, according to Markit Group Ltd. That’s the lowest since Feb. 13.

The index typically falls as investor confidence improves and rises as it deteriorates. 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 debt.

Chesapeake Energy

Bonds of Chesapeake Energy Corp. are the most actively traded U.S. corporate securities by dealers today, with 42 trades of $1 million or more as of 11:15 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 1.01 basis point to 30.51 basis points as of 11:15 a.m. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

Demand for asset-backed securities tied to auto debt is being driven in part by an improving outlook for the economy and the automakers, said Chris Sullivan, chief investment officer at United Nations Federal Credit Union in New York.

Claims for unemployment insurance have fallen for three straight weeks, adding to evidence the labor market is recovering from the 18-month recession that ended in June 2009. The jobless rate in January unexpectedly fell to 8.3 percent, the lowest since February 2009.

Growth Signs

European governments awarded a 130 billion-euro ($171 billion) aid package for Greece after talks in Brussels, seeking to avert the region’s first sovereign default.

General Motors Co. reported the largest annual profit in its 103-year history last week, Ford had its 11th consecutive profitable quarter, and Toyota Motor Corp. this month raised its net income forecast for the fiscal year ending March 31.

U.S. sales of cars and light trucks rose 11 percent in January from a year earlier, Autodata Corp. said Feb. 1. The light-vehicle seasonally adjusted annualized rate was 14.2 million last month, up from 12.7 million a year earlier, Autodata said. That was the fastest since the “cash for clunkers” government incentive program in August 2009.

“It increases the breadth of the investor base as more people become optimistic on the near to intermediate-term future of the auto industry,” said Wiele of Barclays. “Investors start to look for different ways to get access to the credit of the auto manufacturers.”

Wells Fargo

Sales of auto asset-backed securities may jump 11 percent to about $63 billion this year, accounting for about 55 percent of bonds tied to consumer borrowing, according to Wells Fargo. Top-ranked auto bonds have returned 0.69 since Nov. 17, when spreads peaked last year, Bank of America Merrill Lynch index data show. That compares with a loss of 0.29 percent over the same period for AAA rated corporate bonds.

Spreads on the debt reached as high as 825 basis points in November 2008 amid the credit crisis, Bank of America Merrill Lynch index data show.

Wells Fargo may raise its 2012 asset-backed forecast for auto deals, according to the report last week. The San Francisco-based lender is predicting $63 billion in 2012 issuance.

Nissan sold $1.54 billion of the securities, after increasing the sale from $1 billion, in its largest issue since 2005, according to data compiled by Bloomberg.

The automaker paid 15 basis points more than the benchmark swap rate on $514 million of top-ranked securities maturing in about two years, Bloomberg data show. In November, Nissan paid a spread of 26 basis points on a 2.4-year slice.

Honda Sale

Honda, which boosted a sale to $1.69 billion from $1.25 billion in its biggest offering since 2009, paid a spread of 18 basis points on a $520 million portion of debt that’s rated Aaa by Moody’s Investors Service and matures in about two years, Bloomberg data show. That compares with 20 basis points in October on its last sale.

Ford more than doubled the size of its Feb. 7 offering of debt backed by loans to car dealers, its largest since 2005. The Dearborn, Michigan-based automaker sold $2.3 billion of the debt after initially marketing $1 billion.

A top-ranked portion maturing in 1.92 years priced to yield 47 basis points more than the one-month London interbank offered rate, a borrowing benchmark, Bloomberg data show.

“The insatiable demand for relatively short, high quality assets has encouraged untypically large initial offerings or upsizes at some of the narrowest pricing levels in years,” Sullivan said.


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