April Consumer ABS Market Update

Monthly Commentary

May 03, 2017

Primary

Headlines addressing the weakening of subprime auto loan credit and used vehicle valuations continued in April. Despite the headlines, auto related debt made up nearly 33% of the month’s total new issue volume of $20.0bn. Issuers were able to tap the market with a diverse mix of issuance illustrated by deals from Property Assessed Clean Energy (PACE), Solar, Fleet Lease and Insurance Premium Finance pricing during the month. Year to date, auto related ABS issuance stands at 42% followed by credit cards at 29%, specialized ABS at 13%, and equipment and student loan ABS each comprising 7%.

Among the deals of note were:

  • Navient Student Loan Trust (NAVSL) priced a $1.001bn Federal Family Education Loan Program (FFELP) transaction on April 10, 2017 at 30bps over one-month LIBOR for the 1.25yr AAA rated bonds to 105bps over one-month LIBOR for the 8.35yr AAA rated notes. The 1.25 year bonds and an issuance of 3.62 year bonds both priced inside initial guidance while the 8.35 year bonds were preplaced.
  • Global SC Finance II SRL (SEACO) priced its first marine container transaction in nearly three years on April 18, 2017. The $294mn transaction priced at 205bps over swaps for the single-A rated 5.19 year notes. The deal was oversubscribed and upsized on strong demand.
  • Exeter Automobiles Receivables Trust (EART) priced a $450mm subprime auto loan transaction on April 19, 2017 at 80bps over swaps for the AA rated, 1.0 year bonds to 500bps over swaps on BB rated, 4.1 year bonds. Exeter’s transaction priced 5bps wider on the AA tranche and 60bps wider on the BB tranche from their last transaction at the end of January of this year.
  • Thunderbolt Aircraft Lease Limited (TBOLT) priced a $345mm mid-life aircraft lease transaction on April 25, 2017 at 4.25% or roughly 226bps over swaps for the single-A rated, 5.2 year bonds. The TBOLT BB rated, 3.57 year bonds priced at 7.625% or roughly 581bps over swaps. Air Lease’s second ABS transaction in the space is collateralized by a pool of 19 aircraft with a weighted average age of roughly 12 years. The deal priced inside of initial guidance and was well oversubscribed.

Secondary

Spreads for high quality consumer ABS such as prime auto and credit card ABS remained resilient in April despite the continued negative headlines surrounding deteriorating subprime auto loan credit and sinking used car values. Rental car ABS and subprime auto subordinate bonds are two auto related ABS sectors that could possibly be vulnerable to used car values. Both sectors felt the brunt of the negative auto sentiment and experienced softness in secondary trading with spreads widening anywhere from 10-30bps during the month. Short, FFELP Student loan ABS tightened in anywhere from 3-5bps tighter while specialized ABS subsectors such as container ABS have rallied on the heels of two new issue deals and improving fundamentals.

Market News

Navient Corp. – On April, 18, 2017, Navient announced the company was in agreement to buy JP Morgan’s student loan portfolio. The $6.9bn portfolio is made up of $3.7bn in FFELP loans, of which $1.6bn is securitized, and $3.2bn in private student loans. Navient’s CEO and President, Jack Redmoni stated: “With the acquisition of nearly $7 billion of education loans, we again demonstrate our capability to successfully execute large, complex transactions for the benefit of our customers and shareholders.”

Credit Card Performance – Bank of America Merrill Lynch’s credit card index showed a slight uptick in charge offs and delinquencies of 26bps and 9bps, respectively on a year over year basis. Payment rate and yield improved on a month over month and year over year basis although three-month excess spread fell to 13.4% which is to be expected as charge offs creep higher. Capital One and Synchrony, issuer of co-branded retail cards with such brands like JC Penny’s and Lowe’s, reported they would increase their net charge off expectations for managed credit card portfolios. Capital One announced its net charge offs increased to 5.1% from 4.7% at the end of the fourth quarter while Synchrony is raising its net charge off expectation to 6.37% from 5.69% for the fourth quarter 2016 due to its recent vintage subprime portfolios.

Bank of America Merrill Lynch Global Research Bank Card Index

Source: Bank of America Merrill Lynch Research

Spreads

Source: JP Morgan Research

 

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