Investor demand for securities backed by auto loans has led a growing number of commercial banks to securitize their portfolios.
But the banks' return to the arena after a near-total absence of nearly two years could well be their last hurrah in this securitization market, where the competition from nonbank lenders has drained much of the profit from the business.
Charles Hindmarsh of State Street Boston Capital Corp., said he expects the auto finance market to go the same route as the credit card business, where an estimated 80% of securitizations are offered by narrowly-focused "monoline" nonbanks.
The reason is that nonbank lenders critically need the backing of the secondary market to finance their growing loan business.
"The only place they are going to find financing is through securitization," said Mr. Hindmarsh, managing director of State Street's asset-backed securities unit.
In fact, commercial banks' accounted for a mere 9% of the auto loan securitization market in 1994, according to figures from Moody's Investors Service. By comparison, just the finance arms of the nation's Big Three auto manufacturers - Ford, Chrysler and General Motors - had a commanding 82%.
Nonetheless, current market conditions are proving too tempting for banks to pass up. Banc One Corp. and Keycorp, for instance, have tapped the market this year.
Banc One's Auto Loan Trust sold more than $880 million in auto-backed securities in April, while Keycorp netted $299 milion in its June 26 sale.
The Keycorp sale shows how favorable market conditions have become. The offering's senior-class notes were sold at 45 basis points over comparable- maturity Treasury securities.
Craig Platt, senior vice president in the Cleveland, Ohio-based bank's national consumer finance division, remarked at the time of the sale that the interest rate was nearly 200 basis points lower than a similar offering would have paid in 1994.
The lower interest rates and narrower spreads are luring other banks into the market as well. Boatmen's Bancshares Inc. of St. Louis has filed for a $300 million auto finance offering later this year, while NationsBank Corp. is rumored also to be preparing a similar securitization.
Others see the growth in the market coming from the ability to securitize auto leases. The market has become attractive because of the first public offerings of lease-backed securities by World Omni Financial Corp. and Ford Motor Credit Corp.
The deals were unusual in two ways:
First, the loans were securitized through what is known as a titling trust. By initially placing the vehicles' titles in the possession of the titling trust, the titles remain the property of the trust, reducing the number of costly title changes.
Second, the securities also pass on to investors a portion of the uncertainty about the value of the vehicle at the end of the lease.
"There is a little more variability in these transactions," said Bruce Fabrikant, a senior analyst in structured finance with Moody's. As a result, "credit enhancement is higher than in a traditional lease transaction."