And not every company is finding the asset backed market open to them when they want to borrow. Southern Auto Finance Co. this month delayed its first sale of bonds backed by subprime car loans, and used car dealer DriveTime Automotive Group Inc. paused the sale of over $350 million of bonds backed by subprime auto loans in late September.
Even so, companies that can borrow in either the unsecured or ABS markets are often choosing to securitized debt because it’s more reliably open for business now, said Emile Ernandez, managing director at Florida-based asset manager Kawa Capital, which invests in ABS.
“Given the volatility right now it doesn’t surprise me that if you have a choice between the two, you’ll pick securitized,” Ernandez said.
Asset backed notes have weakened this year, but they’ve been hit less hard than other kinds of debt. The Bloomberg index of the securities was down 5.6% through Thursday, compared with a nearly 20% drop for investment-grade corporate bonds. Junk bonds fell 14.6% over that period.
Consumer Health
Part of the appeal of asset-backeds is that households these days are in relatively good financial shape, with the ratio of household debt payments to total disposable income having fallen sharply over the last 15 years. During the pandemic, stimulus checks helped many families pay down debt. For auto loans and the bonds that package them, that’s helped drive delinquency rates to historic lows during the pandemic.
Still, some investors worry about rising risks as the Fed tightens rates. Consumer debt performance is often tied to unemploment, which may rise as higher rates cut into economic growth.
Auto delinquency rates rose in August, with losses for subprime auto debt nearing pre-pandemic levels, according to S&P Global Ratings. Cathie Wood, founder of Ark Investment Management LLC, recently warned that auto debt could face the risk of “serious losses” because of declining prices in the used car market, which reduces the value of autos that get repossessed after borrowers default. She said the shift IN consumer taste toward electric cars may further cut into used car prices.
Nevertheless, as bonds broadly suffer, many investors see asset-backeds as offering good yields given the potential downsides.
“You don’t need to buy risky stuff anymore,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management.
This article was provided by Bloomberg News.