Strong New Issuance Drives ABS Market Forward in April

Consumer ABS Market Update

May 07, 2019

Primary

Investors were firmly focused on the new issue market in April with a spate of issuance in the first half of the month. A total of 15 transactions, totaling roughly $12.0bn, priced during the week of April 8 alone. The market priced a total of $24.7bn in April and $82.0bn year to date, according to JP Morgan research. This was slightly behind last year’s pace of $83.0bn at the same point. Auto-related ABS dominated new issue volume, accounting for nearly half of all ABS at 48% thus far in 2019. It was followed by credit card, 16%; student loans, 9%; and specialized ABS, 16%. Among the deals of note were:

  • PFS Financing Corp (PFSFC) priced a $300mn insurance premium finance ABS transaction on April 9 at 52bps over swaps for the 2.99 year, AAA rated bonds to 80bps over swaps for the 2.99 year single-A rated bonds. The deal was upsized $50mn and all three tranches priced 5bps inside price guidance on very strong demand.
  • GE Capital Aviation Services (STARR) priced a $474mn aircraft lease ABS transaction on April 12 at a 4.125% yield or roughly 172bps over swaps for the 5.15 year single-A rated notes to 6.50% or roughly 411 bps over swaps for the BBB rated subordinate bonds. The deal covers leases on narrow body aircraft exclusively (no 737-MAX) with a weighted average age of 5.9 years and a weighted average remaining lease term of 6.6 years.
  • AESOP Funding II LLC (AESOP) priced a $650mn rental car ABS transaction on April 16 at 95bps over swaps for the 5.20 year AAA rated notes to 185bps over swaps for the BBB rated subordinate bonds. The transaction was upsized $250mn, heavily oversubscribed and priced 10bps to 15bps inside guidance.

Secondary

Secondary trading was notable for its lack of activity throughout the month. Spreads for most ABS subsectors marched tighter from first quarter levels. Short, liquid, high quality consumer ABS continued to be in demand given the inverted shape of the swaps curve with some short duration credit card ABS trading with zero to negative spreads to swaps. Other specialized ABS and subordinate bond ABS like subprime auto loan subordinate ABS (particularly ratings upgraded and de-levered bonds), equipment ABS, and rental car ABS saw spread tightening during the month. Aircraft ABS saw an increase in secondary trading in April but spreads haven’t reached levels seen in 2018.

Market News

Kroll downgrades two subordinate classes from 2016 subprime auto loan transaction. Kroll Bond Rating Agency downgraded the Honor Automobile Trust 2016-1 class B to B+ from BB+ and class C to C from CC on April 25. The rating agency cited “cumulative net losses increasing by 1.72% from 29.43% to 31.15% over the three collection periods since KBRA’s January 2019 review. In addition, the reserve account remains fully drawn and overcollateralization has continued to erode and remains negative.”

Credit card ABS performance. Bank of America Merrill Lynch’s credit card ABS index showed stable performance on both month-over-month and year-over-year bases. Payment rate improved 40bps to 29.11% while yield was higher 116bps on a year-over-year basis. Charge-off and delinquencies showed relatively stable performance year over year, currently standing at 2.45% for charge-offs and 1.51% in delinquencies.

Bank of America Merrill Lynch Global Research Credit Card ABS Index

Source: Bank of America Merrill Lynch Research

Spreads

Source: Bank of America Merrill Lynch Research

 


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