09/30/2011

Auto-Loan Issuers Steering Toward Floaters

Look for automakers to structure some of their upcoming deals with large amounts of floating-rate paper.

Historically, all but the shortest-dated bonds backed by auto loans and leases have carried fixed interest rates, in part because the underlying credits are generally fixed-rate. The idea of adding more floating-rate components is to entice buysiders who normally would invest in floaters backed by credit cards or home-equity loans, but have been frustrated by a lack of issuance in those asset classes. With demand for floaters running high, automakers can justify the added expense of entering interest-rate swaps to convert portions of their deals into floating-rate paper.

Nissan was the first car company to employ the strategy in today’s market. On Sept. 21, it priced $970 million of bonds backed by auto leases, including a $378 million tranche of triple-A-rated floaters. That was in addition to a $156 million slice of commercial paper commonly found at the top of asset-backed deals.

The floating-rate triple-A portion priced at 18 bp over one-month Libor. Bank of America, Barclays and Credit Agricole ran the books.

By building floaters into the transaction, Nissan also was able to reduce the amount of paper that had to be absorbed by its regular investor base. “That was very large for a lease offering,” a source said. “So to be able to place a $378 million slice of [floating-rate notes] was key to getting the whole thing sold.”

The current situation essentially is the reverse of the supply-and-demand balance that existed prior to the credit crisis. Back then, there was so much floating-rate paper in the market that investors saw auto-loan bonds as one of the few opportunities to buy asset-backed securities with fixed interest rates.

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