European asset-backed investors, who traditionally would buy into collateralized debt obligation equity tranches, are beginning to consider consumer ABS equity tranches as a diversification play, says Birgit Specht, head of European securitization research at Dresdner Kleinwort Wasserstein in London. Investors are moving down the credit curve in the consumer sector due to continued volatility in the corporate bond markets, she adds.
In addition, investors in general, are increasingly looking to single-A, triple-B and double-B rated consumer paper as spreads on higher-rated paper tighten. Triple-A and double-A spreads have tightened appreciably since January and investors looking for 45 basis points in spread have to buy lower-rated tranches, says Specht.
"I'd rather be exposed to a pool of mortgage or car loan payers than to a triple-A tranche of a [collateralized debt obligation]," says one London-based investor. He is taking more interest in single-A and triple-B consumer tranches for yield pick up. For example, the triple-A tranche on Renault's upcoming car loan deal was seeing price talk last Tuesday of three-month EURIBOR plus 17 basis points, whereas price talk on the single-A tranche is three-month EURIBOR plus 45.