Tags: subprime | car | debt

Probe Fails to Restrain Sales of Debt Backed by Subprime Car Loans

Wednesday, 10 Sep 2014 02:02 PM

The U.S. government probe into auto loans made to people with spotty credit is doing little to derail sales of bonds backed by the debt, even as investors demand more to own the riskiest pieces.

Lenders are planning about $2 billion of securities that are either predominantly backed by subprime loans and leases or include significant chunks of the debt. The offerings include a $1.1 billion transaction being marketed by Santander Consumer USA Holdings Inc., its first offering since disclosing last month it received a civil subpoena from the Department of Justice that’s part of a probe into lending practices.

The pending sales show how cheap funding for firms that make the loans is continuing with little disruption as fixed- income investors seeking an alternative to low interest rates buy up the debt. Even before the latest deals, companies sold $14.2 billion of the securities through Aug. 19, compared with $21.5 billion issued in all of 2013, according to Barclays Plc. The pace is the fastest since the record $27 billion in 2006.

“It’s hard to get hurt in these deals,” said Dave Goodson, the head of securitized products at Voya Investment Management, which oversees $214 billion in assets. The bonds have “held up well, relatively speaking.”

Cheap Loans

Sales of the securities are helping lenders funnel cheap loans to U.S. households, spurring light-vehicle sales that are on target to reach 16.3 million this year, the most since 2006. Auto debt outstanding stood at $910 billion at the end of the first quarter, the highest in more than a decade, according to Bloomberg Intelligence.

With that surge in borrowing, federal prosecutors are investigating lending practices amid concern that standards are slipping as the segment booms. The increased competition is pushing lenders to loosen terms to gain an edge, Moody’s Investors Service said last month.

While Santander is poised to pay relative yields that are 0.35 percentage point more than a June transaction for its riskiest and smallest portion being offered, its cost to sell the biggest piece, which offers more protection from losses, would increase as much as 0.07 percentage point, according to a person with knowledge of the deal.

Regulatory Scrutiny

The $91 million, lowest-ranked portion, rated BBB+ by Standard and Poor’s, is being marketed to pay as much as 165 basis points more than benchmark interest rates, said the person, who asked not to be identified, citing a lack of authorization to speak publicly. That compares with 130 basis points, or 1.3 percentage point, on similar debt sold by the Dallas-based lender in June.

Laurie Kight, a spokeswoman for Santander, declined to comment on the offering.

“This is in some way related to the increased noise in the space,” Voya’s Goodson, who’s based in Atlanta, said in a telephone interview. “There is an increased appreciation by investors for the regulatory scrutiny.”

Other asset-backed transactions linked to subprime auto debt being arranged this week include a $709 million deal from General Motors Co. lender GM Financial that’s tied to lease payments. A unit of Irvine, California-based Consumer Portfolio Services Inc. is also offering $273 million of securities.

Delinquencies Rise

The deals are coming as the delinquency rate on car loans to people with low credit scores rises, according to S&P. Payments more than 60 days late climbed to 3.31 percent of debt outstanding in June, from 2.77 percent a year earlier, S&P said in an Aug. 18 report, citing the latest available statistics.

Borrowers are falling behind after average credit scores declined and as lenders lengthened loan terms and reduced down payments to cater to cash-strapped customers, Moody’s analysts led by Peter McNally said in an Aug. 19 report. Losses on the debt have climbed to 4.62 percent from 4.22 percent, according to S&P.

Lenders are starting to pull back and charge higher interest rates as losses climb, according to Moody’s. Credit scores for used-car loans started rising in the second half of 2013, Moody’s analysts said.

“That caution, if it continues, could help rein in subprime auto loan losses,” the Moody’s analysts wrote.

Most Vulnerable

Asset-backed bonds linked to subprime auto loans rated BBB are yielding 155 basis points more than benchmarks, an increase of 55 basis points from a year ago, according to Wells Fargo & Co.

If lenders hold the line, losses will likely be contained in the near-term, according to the Moody’s analysts. It is too early to tell if the recent trend toward tightening credit will translate to lower losses, the analysts said. New entrants will be the most vulnerable should loans start souring at a faster pace, they said.

“In the event of a rapid increase in loan losses, operational risks will be especially pronounced in auto-loan ABS sponsored by smaller, inexperienced lenders with limited financial resources,” the analysts said.

© Copyright 2017 Bloomberg News. All rights reserved.

 
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The U.S. government probe into auto loans made to people with spotty credit is doing little to derail sales of bonds backed by the debt, even as investors demand more to own the riskiest pieces.
subprime, car, debt
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2014-02-10
Wednesday, 10 Sep 2014 02:02 PM
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