Auto Loan-Backed Proposals Make Majority of 2009 Issuance

July 30, 2009

It looks like those bonds that are back by auto loans constitute the larger portion of the asset-backed deals that have been issued so far this year.

This assists those consumers who plan to shop for vehicles because they can get loans at lower rates since financial institutions will offer deals that are more attractive. With lower monthly payments, borrowers would be less likely to default on their loans in the middle of such a weakened economy.

As of July 24, the issuance of asset-backed securities was at $77 billion. It was actually down from $126 billion at the same time last year. The 40% issuance total – easily worth $28 billion – is concentrated in the auto sector. This is a 29% increase from 2008 total during the same period. Such auto loan-backed deals have taken first place from those backed by credit card loans, which have comprised about a third of the issuance, a 46% decrease from last year.

According to one expert, this heavy issuance of auto deals is partly based on the overflow of deals that are left over from the end of 2008.

A majority of those deals that were ultimately sold in 2009 so far were also eligible for low-cost funding from investors through the TALF program. Issuers have included major auto companies like Ford, Honda, Nissan, Volkswagen, and Chrysler.

This move has given the Federal Reserve the opportunity to give the securitization markets a serious boost in order to lower the tensions in the credit markets.

Those loans coming out of the automotive sector represent about 20% of all consumer-asset-backed securities issuance throughout a typical year. The proposals offer relatively safe investment. According to some figures, from 1986 through the first quarter of 2009, auto ABS accounted for roughly 20% of all the upgrades and only 1.1% of the downgrades.