Bank of America (NYSE:BAC)
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Bank of America Corp. (BAC) on Wednesday increased its prime auto loan asset-backed securities issue by a third to $2.37 billion as it led the biggest day of ABS issuance five months on Wednesday, according to investors familiar with the issue.
Nearly $5 billion of auto ABS sales on Wednesday comes on the heels of $23 billion last quarter, the most in a decade and swamping the $14 billion of the debt sold in the same period a year ago, according to Barclays. Wednesday's total ABS volume was about $5.4 billion, a number that likely marks the most active new deal day since Nov. 9, according to data provider Dealogic.
Investor demand for auto bonds due to relatively high yields, stable credit ratings and low default rates since the financial crisis has helped fuel a boom in car loans and an expansion of credit to riskier borrowers. Auto loans were the main component to a $8.7 billion increase in U.S. consumer credit in February, following big gains in November, December and January.
"The ABS machine appears fairly unstoppable, especially among auto issuers who have seen a sharp run up in auto purchases by more confident consumers," said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union in New York.
Investor demand has kept yield spread premiums low. Spreads on AAA rated three-year auto ABS are hovering around 25 basis points above interest-rate swap rates, up from a 19-month low of 20 basis points in March but down from 40 basis points in December, according to Credit Suisse.
Other new issues on Wednesday included $1.1 billion subprime auto ABS for General Motors Co.'s (GM) financial unit through dealers led by Credit Suisse Group AG (CS, CSGN.VX), while Royal Bank of Scotland PLC's (RBS, RBS.LN) RBS Securities sold another $1.5 billion in ABS for Toyota Motor Corp.'s (TM, 7203.TO) credit arm, according to investors familiar with the deals. The Toyota issue was increased from $802 million.
Barclays PLC (BCS, BARC.LN) and Credit Suisse sold $457 million of ABS supported by credit cards issued by General Electric Co.'s (GE) GE Capital, meantime. More than $1 billion of other ABS priced earlier this week.
The Bank of America bond, the first auto ABS issued by the bank since June 2010, illustrates a move by many lenders to take market share from the so-called captive lending units of auto makers, analysts said.
A loosening of underwriting standards is creating risks in securitizations, however, according to Moody's Investors Service. The ratings firm last month said risks of bonds sold by a new, untested subprime auto loan ABS issuer Exeter Finance Corp. weren't properly addressed even though the issue still garnered high-investment grades from DBRS and S&P.
Easing underwriting standards could push auto loan losses higher next year, but ABS ratings are expected to be stable, S&P said in a note on Monday.
-By Al Yoon, Dow Jones Newswires; 212-416-3216; firstname.lastname@example.org