Merrill Lynch is planning to become the next firm to securitize a portfolio of auto loans it has acquired from outside originators, according to asset-backed market participants. It would mark the newest entrant into the evolving whole loan auto market, and would be just the seventh such sale of an auto loan portfolio since 2001. Ted Breck, head of asset-backed finance at Merrill, did not return calls and Michael DuVally, a spokesman, was unable to provide a comment by press time. It could not be determined how much Merrill has acquired in auto loans and how much of that it plans to securitize this year.
Bear Stearns was the latest bank to sell a portfolio of auto loans originated by the Big Three--Ford Motor Credit, DaimlerChrysler and General Motors Acceptance Corp.--when it sold the $2.7 billion WALT transaction last autumn. Goldman Sachs and Morgan Stanley have previously sold similar deals.
These sales represent innovation in a market that used to be about expanding to new assets, but is evolving more into one that puts bells and whistles on existing assets, according to some. "It used to be all about the new asset classes, but because some didn't fare that well, people have gone back to the more traditional product," notes Karen Weaver, global head of securitization research at Deutsche Bank.
Overall, the Big Three unloaded $20 billion in whole loan sales last year, and only the WALT transaction ended up in the securitization market. "It should be material this year, a significant portion will end up in securitization," says Kevin Duignan, a managing director in ABS at Fitch Ratings. "The term market has become very mature, so nuances are a big deal," he explains.
The whole loan sales themselves, however, should slow given the unsecured market's improvement. "It was an outgrowth of a specific problem and it's put one more arrow in their quiver," Weaver says, referring to once-wide corporate spreads that caused the automakers to explore new funding options.
Instead of buying a Ford or GMAC offering, bond investors in transactions similar to WALT (for Whole Auto Loan Trust) can buy a more-diversified pool of collateral by participating in such a transaction. This also allows investors who have reached portfolio concentration limits to take on more exposure, which they might do if they felt particularly bullish about autos relative to other ABS sectors. Given the structure is relatively new and doesn't have much of a track record or liquidity, the diversified portfolios trade about two basis points wider than where traditional auto loan ABS is. Servicer risk may also be higher, since the loans may not receive the same servicing from an automaker if they are sold to a bank, according to Weaver.
For its part, Fitch says it plans to rate these transactions as it rates traditional auto transactions. But it also noted in a recent report that servicing relationships are more complicated than in normal auto securitizations. As a result, it plans to pay close attention to servicer changes in whole auto loan transactions, according to the report.