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Sales of subprime car-loan securities soar

Jeff McIntosh/The Globe and Mail

Sales of risky pools of securities backed by car loans have jumped this year as investors' search for yield takes them to corners of the market that boomed in the build-up to the financial crisis.

Sales of subprime auto asset-backed securities have increased year-to-date to nearly $4-billion (U.S.), almost double the volume during the same period of 2012, according to Deutsche Bank data. Subprime auto sales now account for 34 per cent of all auto ABS issuance, surpassing levels last seen in 2007.

The jump in subprime auto ABS deals comes as benchmark interest rates remain at historic lows, encouraging a growing number of investors to buy assets with lower credit quality to capture higher yields.

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"The credit story in the auto market, which includes subprime ABS, is improving," said Harris Trifon, head of ABS research at Deutsche Bank. "That is largely a reaction to a better economy, an ultra-low rate environment and ongoing search for yield."

Demand for the bonds started to rebound late last year as car sales also picked up and average yields on corporate debt fell to record lows.

Since then, auto debt issuers including Santander Drive Auto Receivables Trust, Hyundai Auto Receivables Trust and Ford Credit Auto Owner have inked large deals with rates near historic lows, in offerings that were largely oversubscribed, people familiar with the sales said.

Investor demand is already being reflected in increased financing options at dealerships, which last month helped propel U.S. car sales 3.7 per cent higher to 1.2 million vehicles.

U.S. auto makers, including General Motors and Ford Motor, estimate that demand for cars and trucks will stay resilient in 2013. That, in turn, can help boost sales of total auto subprime ABS to as high as $25-billion, up from $18-billion in 2012, according to Deutsche Bank.

"We expect the issuance trend to remain in place for the foreseeable future," said Mr. Trifon.

Demand for the securities in the secondary market has also been strong. The Barclays ABS (auto) index shows spreads tightening to 0.49 basis points over similar swaps, compared to 0.83 basis points a year ago, and other ABS asset classes have shown similar tightening as buyers pile in.

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Rising used-car values, which boost recovery rates on defaulted debt and ease losses for bondholders, have also helped lift subprime auto debt recently. However, the securities' popularity has yet to reach levels that point to looser underwriting standards that were common in the build-up to the financial crisis.

"Credit standards have not deteriorated back to levels seen during the debt bubble," said Adrian Miller, director of fixed income at GMP Securities. "As long as the economy keeps growing and lenders keep a conservative bias, the jump in subprime auto ABS sales is not alarming."

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