Bloomberg News

Volkswagen Leads ABS Sales Toward Most Since ‘07: Credit Markets

November 16, 2011

Nov. 17 (Bloomberg) -- Bonds offerings tied to auto debt are accelerating, poised for the biggest year since 2007, as vehicle sales reach an eight-month high and an improving economy boosts confidence that borrowers will be able to make their car payments.

Volkswagen AG sold $1 billion of securities linked to auto leases yesterday, 33 percent more than planned, bringing sales for the year to $66 billion, the same amount sold in all of 2010, according to data compiled by Bloomberg. Some $24.5 billion of this year’s sales have come in since the end of August.

Borrowers from Daimler AG’s Mercedes-Benz unit to Toyota Motor Corp. are issuing asset-backed debt with October light- vehicle sales in the U.S. beating analyst estimates and delinquencies on the debt at about half the peak reached last year. Investors favor the top-rated securities for their shorter maturities, typically one to three years, and relative yields at the widest level in almost 18 months.

“The sector has performed well through multiple credit cycles,” James Grady, a managing director in New York at Deutsche Asset Management, with $240 billion under management, said in a telephone interview. “It’s one of the handful of asset classes that came out of the financial crises largely unscathed.”

Late Payments Fall

The extra yield investors demand to hold top-ranked auto asset-backed securities was 89 basis points, or 0.89 percentage point, as of Nov. 15, the widest since May 25, 2010, according to Bank of America Merrill Lynch’s Asset-Backed Securities, Automobiles, AAA Rated index.

Late payments on auto loans to the most creditworthy borrowers declined to 0.48 percent in September from 0.54 percent the prior month, according to Moody’s Investors Service. Delinquencies peaked at 0.89 percent in January 2010.

Elsewhere in credit markets, BHP Billiton Ltd. and Lowe’s Cos. led corporate borrowers selling $10.7 billion of debt as issuance this month climbs to the highest level since May. Fannie Mae and Freddie Mac mortgage bonds gained after the government-supported mortgage lenders detailed changes to their refinancing rules. Interest-rate swap spreads, a gauge of financial system stress, rose to the highest level in almost 18 months.

Bonds of New York-based JPMorgan Chase & Co. were the most actively traded U.S. corporate securities by dealers, with 166 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

BHP Billiton, Lowe’s

Melbourne-based BHP Billiton, the world’s largest mining company, sold $3 billion of bonds in its first U.S. dollar- denominated offering in more than two years, Bloomberg data show. Mooresville, North Carolina-based Lowe’s issued $1 billion of notes a day after Standard & Poor’s cut its credit grade one step to A-.

Corporate bond sales in the U.S. have climbed to $77.8 billion in November, the most since $158.9 billion of the debt was issued in May, Bloomberg data show.

The cost of protecting corporate bonds from default in the U.S. increased for a third day, reaching the highest level in more than a month.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 2.3 basis points to a mid-price of 134.6 basis points as of 5:01 p.m. in New York, according to Markit Group Ltd. That’s the highest since Oct. 11. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 4.2 to 185.1.

Fannie Mae

Both indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Fannie Mae’s 6.5 percent, 30-year fixed-rate mortgage securities climbed about 0.19 cent on the dollar to 110.53 cents, the highest since Oct. 14, as of 5 p.m. in New York, Bloomberg data show.

Fannie Mae and Freddie Mac offered additional information on Nov. 15 on adjustments to refinancing rules for loans to borrowers with little or no home equity under the Home Affordable Refinance Program. Their letters to lenders suggested less relief for so-called representations and warranties that can be used to forced mortgage repurchases than some investors anticipated.

Rate-Swap Spreads

“The rep and warranty relief newly offered by Fannie Mae through yesterday’s announcement is not all that significant and, at the very least, somewhat lower than what has been already been priced in,” Nomura Securities International Inc. analysts led by Ohmsatya Ravi in New York wrote in a note to clients.

Rate-swap spreads widened as Fitch Ratings said further contagion from Europe’s debt crisis would pose a risk to American banks. The difference between the two-year rate and the comparable-maturity Treasury note yield increased 4.63 basis points to 51.44 basis points, the most since May 2010, Bloomberg data show. A basis point is 0.01 percentage point.

“Fitch believes that unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based ratings company said in a statement.

Loan Prices Decline

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index fell for the fourth time in five days, declining 0.09 cent to 91.83 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has declined from 92.25 on Oct. 28, the highest since August.

Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.

In emerging markets, relative yields added 7 basis points to 407 basis points, the widest since Nov. 1, according to JPMorgan’s EMBI Global index. The measure has ranged from 259 on Jan. 5 to 496 on Oct. 4.

Auto debt accounts for 55 percent of issuance of asset- backed securities, up 3 percentage points from 2010.

Volkswagen’s offering, tied to automobile leases, was increased from $750 million, Bloomberg data show. The Wolfsburg, Germany-based maker of Passat and Jetta sedans paid 60 basis points more the benchmark swap rate on a $92 million slice of top-ranked bonds maturing in 2.38 years, compared with 47 basis points on similar debt sold in October 2010, Bloomberg data show.

Mercedes, Toyota

Mercedes-Benz issued $1.1 billion of securities linked to automobile leases on Nov. 9, paying a spread of 60 basis points more than the benchmark swap rate on an $80.5 million slice of top-ranked debt maturing in 2.1 years. Toyota sold $879 million of bonds backed by auto loans on Sept. 21, increasing the size of the deal from $586 million. The company paid a spread of 21 basis points on similar debt due in 2.15 years.

Offerings of auto asset-backed debt composed of loans, leases and dealer payments to finance cars on the lot has recovered after plummeting to $49 billion in 2008 from $78 billion the prior year, Bloomberg data show.

While auto asset-backed securities have “held up well,” underwriting standards have started to slip in recent months and investor protections have fallen from the high levels seen in the aftermath of the financial crisis, said Tom Sontag, a bond manager in Chicago at Neuberger Berman Group LLC.

“We participated in the deals done earlier in the year,” Sontag said in a telephone interview. “We have not been that involved in recent deals.”

Retail Sales Rise

The U.S. economy will grow by 2.2 percent next year, according to the median forecast of 63 economists surveyed by Bloomberg. That compares with a forecast of 2 percent in last month’s poll. The chance of renewed recession fell to 25 percent from 30 percent, economists in the survey said.

Retail sales rose more than projected in October as American shoppers gave the economy a boost at the start of the fourth quarter. The 0.5 percent gain followed a 1.1 percent increase for September, according Commerce Department figures released Nov. 15. The median forecast of 81 economists surveyed by Bloomberg News called for a rise of 0.3 percent.

Confidence among U.S. consumers rose more than projected in November, with the Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbing to 64.2 this month, the highest since June, from 60.9 in October. The median estimate of economists surveyed by Bloomberg News called for a reading of 61.5.

October light-vehicle sales rose to a seasonally adjusted annual rate of 13.3 million, according to Autodata Corp., beating the 13.2 million estimate that was the average of 14 analysts. The pace, which is the best since February, compares with annual sales of $16.8 million from 2000 to 2007, according to Woodcliff Lake, New Jersey-based Autodata.

“As new vehicle sales rise and the economy eventually improves further for consumers, I would expect auto ABS to remain the largest sector” of the asset-backed market, John McElravey, an analyst at Wells Fargo & Co., said in an e-mail.

--With assistance from Christopher DeReza, Tim Catts, Pierre Paulden, Jody Shenn and John Parry in New York. Editors: Alan Goldstein, Faris Khan

To contact the reporter on this story: Sarah Mulholland in New York at

To contact the editor responsible for this story: Alan Goldstein at

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