LAS VEGAS, Jan 24 (IFR) -
A good story coupled with a solid 2012 outlook highlighted the annual "Auto Loan and Lease ABS Sector Review" panel at ASF. Mark Stancher of JPM Investment Management referred to 2012 as the "start to normalization" as regulations start falling into place. There could also be a buildup in warehouse facilities that could provide the beginning for new issuers both domestic and abroad to enter.
A good story coupled with a solid 2012 outlook highlighted the annual "Auto Loan and Lease ABS Sector Review" panel at ASF. Mark Stancher of JPM Investment Management referred to 2012 as the "start to normalization" as regulations start falling into place. There could also be a buildup in warehouse facilities that could provide the beginning for new issuers both domestic and abroad to enter.
Panelists are estimating new vehicles sales to be anywhere from low 13m to 14.5m this year. Used car prices are also strong and are expected to remain that way throughout the year.
Matthew Peters, a MD of securitization at BMO Capital Markets, referred to autos as "the benchmark class" with plenty of access to credit. As credit card issuance dwindles and student loan transactions conform to new changes, autos have become the establishment of U.S. ABS. Mark Stancher expects a 10% increase in new issue auto-related volume, which totals between $75-80bn or 60% of total market volume. Historically, autos have accounted for only 25%, but that is now a thing of the past.
The success of the sector can be attributed to a strong consistency of quality loans. The dealer floorplan segment was also highly recommended as inventory has become more carefully managed. Although the market came out of the crisis in good shape, Peters believes sponsors of autos have become a lot smarter than they were pre-2007-2008.
While 2011 was highlighted by demand for short term paper, panelists feel this year will see an increasing bid for A3 and A4 classes. 2011 was also a good year for auto leases, which were supported by strong residual values. Stancher was also encouraged by credit enhancement provided by subprime or "high yield" autos as it is becoming to be known. Both issuers on the panel, Eric Gebhard of World Omni Financial Corp. and Jason Behnke of Ford Motor Credit Company, expect subordinate bonds to be an important part of the capital structure. Ford's recently completed retail transaction sold both seniors and subs for the first time in about a year.
In terms of regulation, Rule 193, which relates to the due diligence process is not considered to be a major impediment for autos. Behnke said the main difference is they now use pool specific contract testing, which does increase cost. As an investor, Stancher believes the document language won't be much different. Gebhard felt in addition to driving up costs, the regulation is too complex. In terms of loan level disclosure in Reg AB II versus the old grouped data, opinions were varied as to what was most beneficial. On the issue of risk retention, issuers feel a vertical slice retention is too redundant. Ford already takes a first loss position on its deals.
Stuart Litwin, moderator and Partner at Mayer Brown, thinks over-regulation is not necessary in a safe haven sector such as autos. Rule 17-g-7 regarding rating agency reports was his prime example.
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