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June 09, 2017  

Reassured Alphabet Back In Buying Mode

Google parent Alphabet has reversed a contraction in its asset-backed bond portfolio.

Following a lengthy reduction in those holdings, indications heading into this year were that the Mountain View, Calif., company would remain on a similar path. But it instead boosted its asset-backed securities exposures from $1.9 billion at yearend to $2.5 billion on March 31.

The additions appear to have accelerated since then, with bankers and issuers reporting in the past month that Alphabet has bid more frequently for their deals. Eventually, the talk is that it could increase its asset-backed bond investments to an all-time high of $5 billion.

Alphabet’s recent investments mostly have stuck with its usual preference for triple-A-rated bonds backed by prime-quality auto loans, subprime auto loans and credit-card receivables, typically with shorter terms. But in a break from past practices, it also is seeking higher yields by taking some longer-dated junior exposures to those deals.

The focus among those positions appears to be on higher-level mezzanine securities, where the company is able to pick up an extra 30-40 bp. Take a $1 billion auto-loan deal that Ally Bank priced on May 16 with Barclays, Deutsche Bank and RBC Capital running the books. That offering, which drew some interest from Alphabet, included a class of 3.4-year notes with double-A grades that priced at 52 bp over swaps — versus 17 bp over eurodollar futures for a one-year piece with triple-A marks.

Alphabet was among a number of investors that pulled back on their purchases in recent years amid concerns about rising interest rates and vanishing liquidity, cutting its asset-backed bond book from a high of $3.6 billion at yearend 2014. But sources said the company since has concluded that those holdings are less exposed to interest-rate fluctuations than it feared.

In a move that dovetails with its renewed buying push, Alphabet is seeking an experienced capital-markets professional to take a newly created post as head of credit management. The recruit’s duties would include ensuring that the company is achieving optimal returns on its asset-backed bond and corporate-bond exposures.

Alphabet’s asset-backed bond portfolio represents a small portion of its overall holdings of so-called marketable securities. Those investments totaled $92.6 billion on March 31, up from $86.6 billion at yearend 2016.