Despite tumbling stock prices and negative news nearly every week, subprime auto lenders are still finding buyers for their asset-backed securities.
Issuance of securities backed by loans to consumers with poor credit histories was higher during the first quarter than in the same period a year earlier, said John C. Speaks, vice president at Moody's Investors Service, although companies must offer higher yields than before.
"We don't see what everyone's talking about," said Mr. Speaks, referring to speculation about the demise of subprime auto lending.
In the first quarter, according to Mr. Speaks, $3.2 billion in securitizations were submitted to Moody's for investment rating from 19 subprime auto lenders. That's greater volume from more companies than a year ago, he said.
Similarly, Rob Schwartz, director of asset-backed research at Prudential Securities, observed: "The market for this paper is still pretty brisk. Deals are still getting done, and people still want this paper."
Securitization is the lifeline for most subprime auto lenders. They package and sell to investors the loans they make to consumers with subpar credit and use the proceeds to finance their operations.
At a time when stockholders have been fleeing the subprime sector in light of unexpectedly high losses for some major industry players, securitization has become even more crucial to the lenders.
Last week Americredit Corp., viewed as one of the more solid companies in the field, issued a $250 million securitization in the public market priced at 33 basis points over the London interbank offered rate and 40 points above U.S. Treasury notes.
Most subprime auto securitizations, however, are privately placed. That means there's no prospectus, and investors must rely on the ratings agencies and their own due diligence in deciding whether to buy into a deal
And heightened vigilance is in order right now, Mr. Speaks told investors last week at a conference on exotic asset securitizations sponsored by Frank J. Fabozzi/Information Management Network.
"Twelve to 18 months ago, this industry was in a growth phase," Mr. Speaks said. "It's not now. We're starting to see winners and losers. But this shouldn't cause a panic; it should be expected. And if investors do their homework-which up to now they haven't done-they'll find some very good companies."
Traders in the market insist this is happening, with pricing as the telltale sign. A year ago, pricing for most bonds reflected the fact that investors were eager to snap up the high-risk, high-yield paper of subprime auto lenders, traders say.
"A year ago, spreads got real tight across the board, regardless of who was issuing the paper," said a trader at a firm closely involved with subprime auto lenders. "It's not that way anymore, but I wouldn't say spreads have widened for everybody."
Dan Castro, director of asset-backed research at Merrill Lynch & Co., said chargeoff rates for lenders focused on the riskiest borrowers, known as "D" credits, range from 5% to 7%. They will probably continue to rise, which means yields of securities will probably rise.
