07/20/2012

Toyota, Hyundai Accelerate Issuance Plans

Hyundai and Toyota plan to increase their production of asset-backed securities in response to seemingly insatiable investor demand for auto-loan paper.

Toyota had been expected to roll out just one more securitization of prime-quality loans before yearend — a roughly $750 million deal slated for September. But it now looks like investors can count on at least one additional offering in November. There’s also a chance the Japanese automaker could tee up a deal backed by leases, given that it filed a shelf registration for such bonds with the SEC last October.

Hyundai, meanwhile, boosted the size of its most recent transaction to $1.5 billion, from $1.25 billion. Bank of America ran the books on the July 10 offering, with a class of one-year bonds with triple-A ratings going out the door at 10 bp over swaps — 4 bp tighter than levels suggested by BofA.

Including this months’ offering, Hyundai has issued $3.6 billion of auto-loan paper this year. That already tops the $3.5 billion of bonds the company sold in 2011, which until now was its most active year ever. And Hyundai isn’t finished, with a $1 billion transaction in the pipeline for October. Other lenders are planning similar increases.

Both Hyundai and Toyota are exploiting rock-bottom funding costs thanks to a surge in demand for auto-loan securities by mainstream institutional investors including pension funds and insurance companies. Investors are willing to accept low yields because they view the bonds as extremely safe in light of strong performance among the underlying loans. Indeed, the loss rate among pools of prime-quality auto loans is at its lowest level on record, according to Fitch.

“Investors want more,” one securitization banker said. “They are telling us they can absorb any new supply, which means we won’t see a slowdown even in this tough environment. That doesn’t mean that if there’s some big event they won’t stop, but for now we are riding this wave for as far as it will go.”

Toyota has securitized just once so far this year, despite a 28.7% increase in its vehicle-production volume through July 15. Until now, it has relied more heavily on unsecured debt to fund its lending business, selling $6.3 billion of corporate bonds since Jan. 1. Its lone asset-backed offering was a $962 million transaction that priced April 11 with RBS running the books.

But the auto industry as a whole is on track to surpass last year’s output of bonds backed by prime and subprime loans, leases and dealer-floorplan credits — especially if spreads remain so low. To date, auto lenders have issued $46.9 billion of asset-backed securities this year, compared to $55.2 billion for all of 2011, according to Asset-Backed Alert’s ABS Database.

Of course, all bets are off if investors suddenly are spooked by another flare-up in Europe’s debt crisis or fresh signs of economic weakness in the U.S. But even then, buyers would be apt to seek the relative safety of auto-loan paper, fueling continued issuance.

“When you look at this market and how healthy it is, it will now take a very major event to slow things down,” one issuer said.

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