Repackaged auto loans seem like an unlikely place for mauled credit investors to hide, but they are outperforming and issuance is at a multi-year high.
Corporations have sold more than $58 billion of asset-backed securities supported by auto loans this year, about 20% more than at this point in 2021. Santander Consumer and First Help Financial both offered deals this week, while Carvana Co. -- the online used car seller whose shares and junk bonds plunged -- plans to sell $605 millon of the debt next week.
“Auto ABS is one of the safe havens in structured credit now,” said Tracy Chen, portfolio manager at Brandywine Global Investment, in a phone interview.
Asset-backed securities can get clobbered during an economic downturn, as consumers get laid off and default on their debt. During the financial crisis, the securities got hit particularly hard as the housing bubble popped and bonds tied to debt including second mortgages and home equity loans headed south.
But auto loan debt is ultimately backed by cars, including loans made to subprime borrowers. Prices on both new and used vehicles are up with prices on both new and used vehicles up 14% over the last year thanks in part to shortages of chips, according to US consumer price index data and the Manheim index. Used car prices have been falling in recent months, but new vehicle prices are still rising.
In addtion, the bonds typically mature within a few years, and with unemployment at just 3.6%, investors are willing to bet that consumers will keep paying their loans in the near term.
The highest-rated, AAA, bonds that most investors buy have safeguards built into them, such as lower-rated portions that are the first to absorb losses.
“It has a short tenor with fast delevering, it’s well enhanced, and the used car prices are still supportive, despite the recent normalization,” Brandywine’s Chen said.
Auto asset-backeds broadly have fallen just 2.6% this year through Thursday after accounting for price movements and interest payments, while high-grade corporate bonds have lost nearly 13%, according to Bloomberg index data.
Even so, companies are paying more to borrow, as inflation rages and the Federal Reserve hikes rates. Santander Consumer’s latest deal featured a AAA rated portion, the A-2 securities, that finishes payments in March 2025 and yields 2.78%. In February, a similar security yielded 1.37%.