January Consumer ABS Market Update

Monthly Commentary

February 06, 2017

Primary

The start of the New Year means ABS sponsors are now subject to new regulations, most notably risk retention via the Dodd-Frank Act and loan level disclosure via REG AB II. Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires ABS sponsors to retain “at least 5 percent of the aggregate credit risk of the assets collateralizing an issuance of ABS interests.” Sponsors may choose from retaining a bottom 5% horizontal slice (first loss piece), a vertical 5% slice of each class of liabilities including the residual, or some combination of the two. ABS Issuers cannot hedge or sell their risk retention pieces until they have held it for at least two years, the original collateral balance amortizes at least 33%, or until the “ABS interests” (bonds and residual combined) drop at least 33%. Although the risk retention rules are new to the market, most ABS sponsors already retain a significant portion of the economics in their ABS transactions, therefore, this will not cause any changes in how they issue ABS. Auto and credit card related debt made up nearly 94% of the month’s total new issue volume of $14.1bn while unsecured consumer loan and solar comprised the remaining $848mn.

Among the deals of note were:

  • CPS Auto Receivables Trust (CPS) priced a $206mn subprime auto loan transaction on January 10, 2017 at 52bps over swaps for the 0.87yr AAA rated bonds to 535bps over swaps for the 4.14yr BB rated subordinate bonds. The subordinate bonds were multiple times oversubscribed.
  • Social Consumer Loan Program (SCLP) priced its seventh unsecured consumer loan transaction on January 20, 2017. The $564mn transaction, the shelf’s largest to date, priced at 180bps over Eurodollar synthetic forward (EDSF) for the single-A rated 1.85 year notes and 275bps over swaps for the subordinate, BBB rated 4.91 year notes. The deal was upsized on strong demand and priced 20bps and 50bps inside the last transaction in the fall of last year.
  • Flagship Credit Auto Trust (FCAT) priced a $300mm subprime auto loan transaction on January 26, 2017 at 68bps over swaps for the AAA rated, 1.00 year bonds to 460bps over swaps on BB rated, 4.20 year bonds. The deal was well oversubscribed and the BBB and BB priced 40bps and 75bps tighter than their previous transaction in October of 2016.

Secondary

ABS investors drove secondary spreads lower across the ABS spectrum in January. FFELP student loan ABS ratcheted in anywhere from 15-25bps tighter from the end of last year on high trade volume throughout the month. To illustrate, FINRA’s Trade Reporting and Compliance Engine (TRACE) reported over $5.7bn in investment grade ABS traded in the secondary market on January 18. It appears the unusually large volume was increased by blocks of FFELP student loan ABS trading towards the end of the day. Specialized ABS subsectors such as marketplace unsecured consumer lending ABS, container ABS, and subprime auto subordinate bonds experienced meaningful spread tightening in the first month of the year as well.

Market News

Credit Card Performance – Bank of America Merrill Lynch’s credit card index showed relatively stable charge off and delinquency metrics on a month over month basis and year-over-year basis. It currently sits at 2.14% and 1.46%, respectively. Payment rate, yield and three-month excess spread improved on a monthover- month basis but were a bit weaker on a year over year basis. Monthly payments rates were higher for nearly three-quarters of trusts in the index with Capital One showing the largest increase of 273bps month over month.

Bank of America Merrill Lynch Global Research Bank Card Index

Source: Bank of America Merrill Lynch Research

Spreads

 

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