Consistency is king for ABS funding
Issuers like Tesla return to programmatic issuance after seeing wider spreads than programmatic peers
It is no secret that ABS investors prefer programmatic issuers. So, in order to maximize results, issuers must show face when market conditions are good to ensure that ABS funding channels remains open when things aren't as rosy. It is the old adage of fixing the roof while the sun is shining, not waiting until it has started to rain.
During volatile markets, companies largely benefit from diversified funding sources. In the ABS world, getting deals done during tough times depends largely on existing relationships with issuers and having a shelf that showcases a strong performative track record. Better still, an issuer that consistently comes to market through thick and thin will win the hearts of investors.
Tesla is the latest issuer to take a step towards becoming programmatic once again. The ectronic vehicle manufacturer paused its ABS issuance program in 2022, after a consistent run of issuance that span all the way back to 2013.
Now, the company is taking big steps to reclaim its prominent name in the auto lease asset-backed securities market. It priced its first lease ABS deal since September 2021 in July, and is currently readying a second transaction with a very similar structure.
Neglecting the ABS market comes with negative repercussions during pricing and pre-marketing for those looking to re-enter, as Tesla felt first hand in July. TESLA 2023-A, its July issuance, was the only lease deal to price that month and the class ‘A-1’ notes priced at 23bp. Similar notes from Nissan’s lease deal in June and General Motors’ deal in August priced at 18bp over the I-curve.
Tesla paper priced wider compared to other prime auto lease ABS issuers across the capital stack, with its double A rated tranche pricing 50bp wider than General Motors’ comparable iteration.
Market participants told GlobalCapital at the time that Tesla could achieve better pricing if it was consistent with its ABS program. Indeed, some investors said they didn’t really consider the deal because they believed it was going to be a one-off transaction.
However, given that it is the second deal in as many months the demand and pricing dynamics might improve for Tesla’s upcoming deal, which is currently in the pre-marketing stage.
Issuer and investors relations in the ABS market are crucial for deal executions. Investors do not only buy the paper, but also the story of the originator and its funding program.
In fact, Tesla wasn’t the only well known issuer returning to the ABS market after a lengthy hiatus. Bank of America issued its first prime auto loan ABS deal in 11 years in July and Porsche came to market after an 8-year break in May.
All notes from Porsche’s prime auto loan deal priced 1bp-15bp tighter compared to notes from a similar deal by its programmatic peer Honda, which was priced five days after the Porsche deal.
And Bank of America’s ‘A-4’ notes from its BAAT 2023-1 deal priced at 95bp, 6bp wider than similar notes with 0.4 years longer weighted average life from Ally’s prime auto loan deal, which was priced two weeks before the Bank of America execution.
Every issuer’s reason for returning to ABS is different. Those three issuers were not only big names in their industry with prime shelves, but they also returned to the market at a time when demand was already booming and spreads across sectors were getting tighter.
ABS investors have been racing to put money to work after the year started off with continuous worries about inflation and recession, which was followed by a brief pause sparked by the banking sector turmoil, pushing investors to catch up during May and the summer months.
While demand is high names like Tesla and Porsche remain able to achieve relatively tight pricing. Yet, not all issuers have the same credence as these household names, especially in a scenario where investor demand is not as robust.
So when investor demand tanked during the fourth quarter of 2022, many issuers weren’t able to execute deals.
Just like newcomers, non-programmatic issuers also pay a premium for their lack of presence in the market. And for issuers who might need the ABS market as a funding source one day, establishing and maintaining market presence and investor relations during good market conditions is a crucial step.
In preparing its second deal just two months after the first one priced, Tesla appears to understand the importance of this.
Being programmatic looks different for every issuer — some tap the market once a year and some every quarter. Regardless, establishing a consistent presence in the market is what helps issuers have access to different types of funding without constantly having to pay the sort of premiums that should be relegated to newcomers. Because when the sun shines, make hay.