China ABS: BMW will not be overtaken
BMW sold an ultra-cheap auto loan securitization in China last week, giving a clear demonstration of investor appetite for highly-rated credits despite the coronavirus epidemic. But other auto financing companies (AFCs) should be realistic about their chances of repeating this success, as liquidity is drying up quickly.
BMW Automotive Finance’s Rmb8bn ($1.14bn) dual-tranche auto ABS transaction met with success last Friday with its top tranche pricing at 3.14%, despite a revolving structure and a long tenor. The transaction got lots of demand from international and domestic investors, and boasted the largest senior tranche in BMW’s auto loan securitization issuance history in China.
Other AFCs are taking note of BMW’s success. Four more auto ABS originators are eyeing the Chinese ABS market in early March, two securitization bankers told GlobalCapital China. Some are also thinking about moving up their planned issuance from April to March, according to a source at the Shanghai Stock Exchange.
It is hard to blame them. Liquidity is abundant at the moment. Although the People’s Bank of China (PBoC) usually eases liquidity conditions in the days before and after the Chinese New Year (CNY) holiday, this year’s amount stands out. PBoC pumped Rmb3tr gross into the interbank market in the three weeks since the market reopened after the CNY break, amid the Covid-19 epidemic. In the same periods in 2019 and 2018, the injections were only Rmb280bn and Rmb1.21tr, respectively. Domestic investors are hungry for high-rated credits to park their extra money in, and are especially hungry for credits with shorter tenors, onshore bankers said.
However, while bond issuance by non-financial institutions in the interbank market has climbed 5.04% this year, top-rated deals with a short tenor have become less common. Since the start of the year, new issuance of triple-A rated deals with tenors of less than a year dropped 34.91%, Wind data shows.
An opportunity for AFCs
This helped push down yields across the curve, but particularly at the short end. Since the beginning of February, the average yield for one month corporate bonds has declined by roughly 30bp, Chinabond data shows. The yields of three year and five year corporate bonds also dropped by roughly 16bp and 8bp, respectively.
This is all good news for onshore AFCs. Most of them are highly rated, at least by domestic rating agencies. Many also offer ABS deals with senior tranches that have weighted average lives of less than a year. But they should not get ahead of themselves — it is unlikely the success of BMW’s deal will be repeated.
This is partly due to the German automaker having clout and name recognition that few can rival. BMW’s ABS deals are usually rated triple-A by international rating agencies and secure a wide range of international and domestic demand.
But more importantly, the current flush liquidity in the market is set to start drying up in the next few weeks.
The interbank bond market is already regaining strength. In the first week after the CNY holiday in late January, Wind data shows there was only Rmb22.5bn of newly issued short-term commercial paper and medium-term notes — the usual choice for non-financial issuers. That number jumped more than five-fold to Rmb125bn in the second week and surged to Rmb177.7bn last week.
There will be more issuers tapping the onshore bond market as cities like Shanghai and Beijing work on bringing bankers back into their offices. So far, many have been working from home, making it hard to execute transactions.
There is one more problem: rising competition from domestic players. The Chinese auto ABS market is set to expand further this year. After a year-long hiatus imposed by local regulators, many Beijing-based AFCs started to return to the market since late last year.
The market conditions are favourable for now. But if Chinese AFCs want to make the most of the opportunities being offered in the market at the moment, they must act fast — and be realistic.