Co-published Article: nabCapital
Australasia’s Auto Loan Securitisation Market
The Australian/New Zealand Securitisation Market came on-line in the mid-1990s and generally followed the lead of the US and European markets — with residential mortgages being the first, and dominant, asset class to be securitised. It wasn’t until the late 1990s that the first non-residential, mortgage-backed deal emerged in the public market, and although transactions collateralised by auto loans and equipment lease receivables (asset-backed securities or ABS issues) have continued to grow, most deals have stayed out of the public domain, in favour of funding via the large asset-backed commercial paper (ABCP) conduits which exist in the region. In 1998, the term market saw its first ‘pure’ auto loan transaction when Ford Credit Australia brought its FCRT Series 1998-1 transaction to market — issuing three classes of AAA-rated notes, with one unrated, subordinated tranche (retained by the seller). The receivables pool for FCRT 1998-1 was backed primarily by Ford vehicles and a prime obligor base. Key features of this transaction were that it had a revolving period, and it utilised sequential pay, once amortisation began. The deal went on to perform well and set the stage for auto ABS issuers in the region. Since then, two other issuers have brought ‘pure’ auto loan transactions to the public term market. Daimler Chrysler Australia/Pacific and Liberty Financial brought deals to market in 2004 and 2005/2006 respectively. All three deals utilised sequential pay structures and have performed well, with cumulative net losses to date being less than the rating agencies’ base case expectations. Daimler’s pool was backed by a mix of new and used Mercedes and Chrysler vehicles with a prime-obligor profile. In the case of Liberty’s 2005 and 2006 transactions, both are backed by a diverse range of new and used vehicles and have non-prime obligor profiles. Besides Ford, Daimler and Liberty, there are a number of other issuers of auto-backed paper that have regularly tapped into the term market. For example, Bank of Queensland has been a regular issuer since 2003 and more recently, Macquarie Leasing has issued two large deals — potentially building momentum for other issuers who have built up large stock piles of receivables in ABCP conduits, or on their balance sheets. Current favourable market conditions mean that issuers with pent up volume either in conduit warehouse facilities or on balance sheet, should be looking at the term market — even if only as an opportunistic play. As reflected in Figure 1 below, spreads for term auto ABS are touching historical lows. Bank of Queensland and Macquarie Leasing have the luxury of enhancing the size of their term ABS issuances given their multi-asset origination platforms. The transactions, therefore, are not backed by ‘pure’ auto loan pools. Table 1 reflects the pool characteristics of some of the most recent auto transactions issued by the abovementioned market participants. The strong historical performance of these issuers reflects the tight underwriting guidelines of the originators; the high propensity of Australians to pay their debts
Figure 1: Triple-A Margin Above Bills
40 35 30 25 20 15 10 Jul-04
Source: nabCapital
39
2 year AUTO 3 year MBS 3 year CMBS 2 year SUBPRIME
Jul-05
Jul-06
Jul-07
Co-published Article: nabCapital
generally; and the high quality of the assets as well as the high recovery rates. As reflected in Table 1, most of the issuers in the auto (ABS) space still utilise sequential pay structures, and enhancement is more or less sourced via subordination and excess spread. Furthermore, a majority of the transactions typically fund liquidity reserves via the ‘over issuance’ of notes. Pre-determined, revolving periods and flip to pro-rata (serial pay) features are also regularly utilised features. Putting Australasian Auto Loan Securitisation Volume in Perspective In late 2006, Standard & Poor’s reported that current auto/equipment loan receivables funded via ABCP conduits in Australasia stood at A$4.3 billion. Although auto/equipment receivables make up the second largest asset class funded via the region’s ABCP market, when ABCP outstandings are combined with term outstandings, the question still remains: “where has all the auto paper gone?” The question is a very legitimate one given the Australian new car sales market has crossed over the 1 million units per annum mark (thanks in part to a reduction in tariffs applied to foreign manufactured vehicles, and the strength of the Australian dollar). At the
same time, New Zealand new car sales have remained relatively stable over the past two years with approximately 77,000 vehicles sold each year. Obviously size is important, and securitisation volumes in any jurisdiction are ultimately fuelled by sales, however it is the propensity of the consumer to finance those vehicles that ultimately drives a vibrant securitisation market. In Australasia, consumers have a high propensity to finance, and generally finance their vehicle by way of hire purchase, chattel mortgage, finance lease, novated lease or operating lease with the banks, captives and finance companies providing the financing. As reflected in Figure 2, banks provide almost 35% of all vehicle financing in Australia. This alone has probably been the number one factor constraining growth of the auto loan securitisation market, as the banks don’t generally look to securitise their auto receivables. This characteristic differs from the US market where banks tend to leave the business of auto financing to the captives and finance companies. The key point here is that captives and lower-rated finance companies can’t raise funds via deposits (because they are not deposit-taking institutions), and
tend to find the corporate debt market far more expensive than securitisation, thus a vast majority of new and used car sales financed in the US end up in the securitisation market. As the large banks in Australia are highlyrated deposit-taking institutions which can raise funds cheaply in the unsecured bond markets, they have not pursued securitisation of auto loans and leases. Therefore, the active role that banks take in financing auto loans ultimately constrains auto loan securitisation in the region. Additionally, consumers with existing mortgage loans have the flexibility to finance their auto loan via their mortgage, by monetising equity built up in the home or by tapping into a re-draw facility. Growth to Come One of the key factors behind the growth in the Australasian auto loan securitisation market will be the advent of banks entering as more substantial players. Historically, the banks have not looked to securitise this loan product, preferring to securitise large mortgage loan books for the purpose of funding, and regulatory capital relief. However, under the Basel II framework, banks will be encouraged to identify additional asset classes on the balance sheet which are suitable for securitisation.
Table 1: Collateral Composition and Transaction Features
Vision 2004-1 Motor Vehicles New Used Equipment Backed Receivables Other Receivables Seasoning (months) Average Contract Balance 100.0% 69.2% 30.8% – – 21 $30,200 Liberty 2006-1 100.0% 9.0% 91.0% – – 6 $17,400 42.70% 8.30% 8 $54,100 Reds EHP 2006-1 49.0% SMART 2007-2 87.0% 69.2% 17.8% 13.00% – 21 $30,200
AAA Required Credit Enhancement Payment Waterfall Initial Liquidity Reserve Yield Supplement Required
7.50% Sequential Pay 1%, Funded via over issuance of notes Not required
27.50% Sequential Pay 1%, Funded via over issuance of notes Not required
10.00% Sequential Pay, flip to pro-rata 1%, Funded via over issuance of notes Yes -- Funded via subordination
6.30% Sequential Pay, flip to pro-rata 1%, Funded via over issuance of notes Yes -- Funded via Over collateralisation
40
Co-published Article: nabCapital
This may lead to some large auto loan-backed deals. Macquarie Leasing has already brought two deals to market this year totalling almost A$3 billion. That said, nabCapital expects the next 12 to 18 months will see substantial growth in auto receivables securitisation across the region. Whether the growth is driven through the term or ABCP market will depend on a multitude of factors. From a loan securitisation perspective, the banks, captives and finance companies are expected to be driven to the term market given the increased demand from investors, low spread levels and specifically for banks that Basel II influences. Furthermore, as the Australasian ABS market continues to expand and take its lead from abroad, the auto sector could produce more receivables (for example, operating leases, and floor-plan and rental-fleet receivables), which could also fuel growth. Operating-lease transactions present a real growth opportunity, particularly from a term issuance volume perspective. To date, operating lease deals have only been financed via the conduit market — primarily due to the lack of extensive residual value information and limited track record of market participants. The originators who operate in this space have, for the most part, written initial residuals well inside of their peers in the US market — therefore, originators and potential issuers find the conservative residual stresses applied by the rating agencies difficult to digest. Given that operating lease origination volumes have remained robust throughout the region, and conduits have built-up volumes of operating leases, there is expectation that a term deal may be on the horizon. Furthermore, originators now possess extensive historical credit and residual loss/gain data. This can provide a basis for lowering the market value declines the rating agencies apply when assessing operating lease transactions, thus paving the way for more favourable advance rates. Although this article has specifically focused on the auto securitisation market, there is also the potential for the local ABS market to capture an equipment (yellow-ticket) operating lease deal in the near future, given the boom in the local commodities market
Figure 2: Australian Leasing Distribution by Originator Type
Other Lessors 3%
Banks 32%
Finance Companies 18% General Financiers 27%
Source: Australian Bureau of Statistics
and the increased expenditures on largeticket mining equipment. In addition to an issuer-friendly market and changes under Basel II, there are a number of reasons nabCapital expects the auto loan securitisation market to continue to grow, particularly the term issuance space. Local investors are highly concentrated in RMBS — and are anxious to diversify. What’s more, the relative short-dated nature of auto paper and the stable performance of the asset class are further enticing points of reference for investors. These key factors should attract those issuers which have not yet come to market, but have the volume required to seriously consider the term market as an opportunistic play at a minimum. Also, the broader acceptance of Australian ABS deals globally, concerns around RMBS and potential contagion issues across US asset classes, could potentially drive ever better results for Australian and New Zealand issuers entering the market. In summary, strong demand and supply technical factors lead us to be optimistic in the outlook for this sector of the domestic market. nabCapital sees this as an opportune time for auto (ABS) issuers to enter the term market and take advantage of both local and offshore investor demand for Australian/New Zealand backed receivables: issuance margins are close to historical tights, and the availability of data is such that more commercial levels of credit enhancement from the rating agencies is now possible.
For further information, please contact:
John Barry Managing Director, Head of Securitisation Australasia nabCapital T 61 3 8641 4185 E john.l.barry@nab.com.au David Bleakley Director, Securitisation nabCapital T 61 3 8641 2735 E david.bleakley@nab.com.au
41