Subprime and nonprime auto finance companies may increase their securitization issuance next year as further growth and competition pushes non-captives to pursue all means of financing.
Subprime auto notes still offer some of the best return among higher yielding and shorted-dated assets. Analysts at Wells Fargo told clients Dec. 6 to “buy subordinated bonds from benchmark issuers and sectors, including subprime autos.” There could be up to $4 billion more in new subprime auto ABS than this year’s projected $21 billion, analysts at JPMorgan recently projected. In 2013 the number of active sponsors of nonprime auto ABS matched the number of prime sponsors, according to the researchers.
The credit story should be similar to this year’s, and investors can expect some decline in underwriting standards. Credit enhancement should be strong enough to mitigate those concerns, the JPMorgan analysts said.
Ratings agencies including Standard & Poor’s and Moody’s Investors Service are mostly on board with that assessment. The looser credit profile does means investors should expect slightly longer loan terms and higher loan-to-value ratios though, said William Black, a managing director at Moody’s.
But market experts are monitoring credit conditions more closely now, and will likely continue to do so as some struggling players may engage in even riskier lending. Investors are well aware of the weaker players. “We’re looking at underwriting issuer by issuer. Overall, it is easy and we don’t have concerns. There’s a lot of credit enhancement. But it can be very different issuer by issuer,” said a v.p. at a large asset manager.
Exeter Finance Corp., owned by private equity group Blackstone, is one subprime player being closely followed. S&P noted the company’s exponential growth in a report earlier this year, citing potential concerns about Exeter’s ability to manage its expansion. Exeter recently hired a new c.f.o. in an unannounced move (SI, 12/11).
“You can pick your poison,” an auto ABS managing director said. “You want the profitable issuers. There are some that are not, those that are growing too fast. They are driving all their profits back into servicing. They need more people to service their infrastructure. When you’re growing at triple digit rates, that’s way, way too fast.”