The market for asset-backed securities is off to one of its best months ever as banks and other issuers rush to take advantage of strong investor demand and low interest rates.
Through the first four days of August, the market absorbed $2.8 billion of asset-backeds. On Aug. 1 alone, NationsBank Corp. and Ford Motor Co. each completed $1 billion offerings. The $1.05 billion NationsBank's deal was a credit card issue, while the Ford securities were for dealer floor plans, which trade like credit card securities.
The receptive market is a boon to banks, which are experiencing strong demand for new loans.
"If you look at the rate of growth in loans in the banking system today, which is about 9%, and the rate of growth in deposits, only 1%, the difference has to be funded somehow," said Frank DeSantis Jr., a bank analyst with Donaldson, Lufkin & Jenrette.
While most banks would prefer using medium-term funds to meet this shortfall, securitizations are the next favored funding option, Mr. DeSantis said.
As a result of the expanding range of issues, some industry analysts are predicting volume approaching the $12 billion record reported in March. The previous record was $10.7 billion, recorded in August 1994.
While credit card issues have dominated in terms of volume, auto financings are becoming increasingly popular as well, said Craig Platt, a senior vice president in the consumer finance division at Keycorp in Cleveland.
Keycorp recently issued about $300 million in automobile paper. And later this week, Honda is expected to issue $500 million of securities backed by auto loans.
Mr. Platt said part of the reason issuers are coming to market now is that spreads over comparable Treasury securities are 45 basis points now, compared with the 65-basis-point spread that was available in December. For Keycorp's issue, that meant the offering went off at a low cost of 6.04%. It would have cost more than 8% for a similar issue late last year.
"Now, all of a sudden, these deals make economic sense again," he said. "People are saying, we don't know how long this will last, so let's just do it."
Banks are not the only ones funding loan growth in this market. Dan Castro, director of asset-backed securities research at Merrill Lynch & Co., said additional securitizations of credit card, agriculture equipment, and manufactured-housing receivables are scheduled for issuance sometime this month.
"You're going to see a mix of collateral, but my guess is you'll see more credit card issues than anything else," he said.
