Risk Premiums on Subprime Auto Debt Are Sinking Near Record Lows
New found interest in investment-grade and junk bonds leads premiums for structured bonds to rise.
(Bloomberg) -- Subprime auto loans may be suffering from higher delinquencies, but investors are still clamoring for bonds backed by the debt, according to Wells Fargo analysts.
An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations -- as measured by the extra yield the notes offered compared with the benchmark rate -- since 2014, the analysts wrote in a note Monday. The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million.
Insatiable demand for investment-grade and junk bonds has sent investors searching for better deals in the market for asset-backed securities. The newfound interest means risk premiums for structured bonds are plummeting too.
Though August is a “notoriously slow” time for new deals, issuers may be taking advantage of investor demand by bringing more to the market, the analysts said. Since 2012, the average August has seen $11.6 billion of asset-backed issuance, according to Wells Fargo. So far this month, more than $6.8 billion of the securities have been sold, according to data compiled by Bloomberg.
Yield-hungry investors are snapping up subprime auto deals this week, too. The financing arm of General Motors Co. sold $1.2 billion of asset-backeds on Tuesday, and DriveTime Automotive Inc. sold $442 million of the securities, according to people familiar with the matter who asked not to be named because the deals are private.
To contact the reporter on this story: Claire Boston in New York at cboston6@bloomberg.net.
To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins, Kenneth Pringle
