How Hooters Came to Symbolize Bond Market’s DesperationSarah Mulholland
Buyers of asset-backed bonds are embracing newcomers to gain a little more yield and snapping up debt guaranteed by everything from chicken-wing sales to computer leases.
Hooters of America LLC, the chain best known for the skimpy tank tops worn by its waitresses, and the lending arm of computer maker Dell Inc. are among debut issuers this month helping to push sales of asset-backed debt to the highest in five years. The finance arm of Japan’s Kubota Corp. issued debt in April paying relative yields that are a third more than similar securities sold by rival Deere & Co., a market stalwart.
Lending against assets that haven’t been tested by the market’s peaks and troughs is helping investors bolster returns at a time when easy-money Federal Reserve policies have pushed yields to record lows. That’s enabling first-time issuers to raise cash by promising bondholders revenue that has yet to materialize.
“It’s a perfect market for new issuers to go out and obtain cheap funding,” said David Schawel, a money manager at Square 1 Bank in Durham, North Carolina.
Hooters raised $300 million in its sale of bonds linked to the majority of its assets, including revenues from 415 restaurants, franchise agreements and intellectual property, according to data compiled by Bloomberg. The biggest piece of the sale, maturing in 6.6 years and rated the lowest level of investment-grade by Kroll Bond Rating Agency Inc., pays a coupon of 4.85 percent.
Dell Financial, a financing subsidiary of the computer giant that was taken private last year, raised $722 million in its first asset-backed deal last week.
The sales are a departure from offerings by companies such as Ford Motor Co., which has long relied on the asset-backed bond market to fund new loans. The finance arm of the Dearborn, Michigan-based lender has been issuing the securities since the 1990s, according to data compiled by Bloomberg. Deals range from $1 billion to $5 billion, bundling as many as 80,000 loans to customers across the U.S.
Asset-backed debt sales have been climbing back from the 2008 credit seizure, when the market all but shut down and the Fed implemented a program to jumpstart issuance.
With both newcomers and regular issuers relying more on the market this year to fund their lending operations, asset-backed bond buyers should focus on lesser-known issuers to boost returns, Wells Fargo analysts led by John McElravey wrote in a report this week.
About $110 billion of bonds linked to consumer and business borrowing have been sold this year, up from $89.5 billion by the same time in 2013, according to Wells Fargo. Analysts at the bank raised their issuance forecast by $30 billion to $195 billion this month.
Regulatory changes that have altered large pieces of the market have helped keep issuance well below the record $282.7 billion sold near the peak of the credit bubble in 2005.
Under a law that took effect in March 2010, the government stopped making student loans through private companies that funded themselves in the market. The government now issues loans directly. Lenders sold $20 billion of student-loan securities last year, down from $62.2 billion in 2005, according to Wells Fargo.
Banks also are relying less on securitization to fund credit-card lending as accounting rules implemented in 2010 make it less economical to do so.
Auto debt, the largest part of the asset-backed market with $50 billion of sales this year as measured by Wells Fargo, has fueled much of the growth in recent years amid a boom in lending to car buyers with spotty credit.
The drop in issuance creates a favorable environment for new issuers, according to Patrick McShane, an analyst at Kroll.
“There just hasn’t been as much issuance for them to look at, so investors are excited,” he said.
As part of its debut offering, the finance arm of Osaka, Japan-based tractor-maker Kubota sold top-rated debt maturing in 3.8 years that pays 40 basis points, or 0.4 percentage point, more than the benchmark swap rate. That compares with the 27 basis points that Moline, Illinois-based Deere paid on similar securities offered the same month.
“You don’t have the experience to know how the bonds will trade,” Wells Fargo’s McElravey said in a phone interview from Charlotte, North Carolina. “As those issuers become more regular issuers, that concession narrows.
‘Lot of Money’
The Kubota unit was established in 1982 to finance the company’s U.S. operations, according to Moody’s Investors Service, which rated the transaction. The lender is integral to the functioning of its parent, a well-capitalized company with $22 billion in assets, Moody’s said in a report for investors.
Unlike Kubota, Deere is a familiar name to asset-backed investors, having started its asset-backed program more than 20 years ago, Bloomberg data show.
With Fed Chair Janet Yellen telling lawmakers earlier this month that rates will likely stay low for a ‘‘considerable period” as the U.S. economy stages a fitful recovery, investors aren’t likely to lose their appetite for novel issues anytime soon.
“Investors like seeing new names,” McElravey said. “There is still a lot of money to put to work and there aren’t enough places to go.”