Auto1 shows the way for multi-country ABS — but road is potholed

Auto1, the German used car trading company, has made a modest but important step forward on the long journey towards a more pan-European securitization market.

Last week, Auto1 included Austrian loans alongside German ones in its €248.8m FinanceHero 2 securitization.

Its debut deal in 2024 had been backed only by German collateral, but this time 16.7% was Austrian assets.

The receivables are instalment purchase agreements which comply with all applicable laws and rules in both countries.

Multi-jurisdictional deals are rare in most types of securitization in Europe. There are exceptions, but on the whole the difficulties put issuers off.

Making them more possible could contribute to the European Union’s Capital Markets Union initiative to create a large, unified market for capital across the EU.

The premise of that campaign is that the US enjoys a competitive advantage over Europe, since it has one continent-sized financial market, all governed by the same laws.

Securitization and consumer finance make that plain — especially with internet distribution, it is easier for a start-up lender in the US to amass collateral nationwide, then begin financing it with securitization.

The signs from Auto1's deal were encouraging.

Investors were undeterred by the addition of Austrian collateral. The trade was priced more tightly than its predecessor. The triple-A rated senior notes came at 64bp over one month Euribor and were 2.7 times covered at the final terms.

The real confirmation of the homogeneity of the portfolio was sealed by the deal qualifying for the Simple, Transparent and Standardised (STS) classification, which entitles investors to accord it lighter capital treatment.

Some might say this deal only went well because ABS market technicals are so strong that investors are willing to buy anything. But not every transaction has flown since the market reopened this autumn. El Corte Ingles's Spanish consumer finance ABS faced some difficulties in marketing.

This suggests investors are becoming more open to multi-country ABS in Europe, which is useful, since Auto1 plans to return next year with another, as GlobalCapital reported.

The company is well placed to make progress in this area — it facilitated the sale of 690,000 cars last year, in 30 countries from Portugal to Ukraine.

The benefits of multi-country ABS deals are much more obvious for issuers than investors.

Being able to issue a multinational deal could help a lender build up a portfolio large enough to securitize more quickly and flexibly than if it could only issue single-country deals.

Warehouse facilities more often accommodate three or four jurisdictions.

Several originators in Europe have enough loans to do a public securitization, but not if the deal has to be confined to one country,GlobalCapital understands.

Set against this is that a multi-jurisdictional deal is undoubtedly harder for investors and rating agencies to analyse.

The agencies will assess deals as carefully as they can, but investors may not be as patient — and anything that makes life harder for investors is not going to help the deal price tightly.

Mixing one sixth Austrian loans into a German pool is unlikely to make a heady cocktail. But if Auto1 went further for its next deal, it would be wise not to go full Frankenstein and bung in Dutch, Spanish and Romanian loans, for example.

Using jurisdictions as similar as possible in legal system, collateral type and credit performance would be best — Belgium and the Netherlands, for example.

As with most things in securitization, the better the data, the better the result — so the more information that can be built about asset behaviour in each country, the better the market will be able to price packages of different collateral together.

In some parts of securitization cross-border portfolios have long been an advantage — above all, the lumpy asset classes like aircraft finance or commercial property.

Here, concentration in one country is a severe disadvantage; diversification makes portfolio performance more stable and easier to predict.

Blackstone, for example, issued its Sequoia CMBS deal in February, which is backed by logistics properties in France, Finland, Holland and Germany.

But for granular asset classes like mortgages, consumer loans or credit cards, including more than one country disrupts the pattern of homogeneity in the portfolio.

Ultimately, however, until consumer finance and insolvency laws and practices are harmonised across the EU, assets in different countries are going to require separate analysis.

Diversification is good for investors, but they can get that by buying a variety of deals. Cases where it is more efficient for the borrower to mix collateral than keep it in separate transactions may be limited.

In the next few years, multi-jurisdictional securitization of personal finance assets is likely to advance more in steps than leaps.