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How low can it go? Spreads have room to run, say auto buyers

By Matthew Scully
11 Jun 2014

Already tight spreads on senior and mezzanine auto ABS tranches have plenty of room to squeeze tighter, said European auto investors at IMN’s Global ABS conference on Wednesday.

Strong performance and a lack of extension risk are appealing elements in European auto ABS, and investors searching for yield across fixed income continue to see it as the best-yielding asset class for the credit risk, a panel of investors agreed.

“I think spreads can tighten significantly from here,” said Steve White, head of capital markets at London-based asset manager AgFe. “Where else can you get 40bp for a triple-A? You can't.”

The competitive marketplace has investors starting to search for yield in the periphery, such as in new Fiat deals, said Peter Winning, fixed income manager at Aberdeen Asset Management. Over time, those spreads will certainly come in as well, he said.

Diversity needed

Investors would like to see more fixed-rate supply, especially from established and programmatic issuers, panelists said. Such a delivery could help diversify investors’ portfolios, and also attract new types of investors.

“The German issuers, for example, could offer one deal per year as a fixed rate transaction," said Winning. "I guarantee the asset managers would flock in. It’s a chicken and egg problem though. Nobody wants to be the first one to do it.”

Such a move would mimic US auto ABS issuers, who are also seeing high demand push spreads to relatively low levels.

Nissan’s North American leasing unit, for example, priced on Wednesday a $128m, class A-1 tranche to yield 0.18%. That was sold alongside class A-2A and A-2B tranches that compressed down to a respective 16bp over EDSF and 16bp one month Libor.

By Matthew Scully
11 Jun 2014