(Bloomberg) -- Companies are returning to the asset-backed securities market for financing, reviving deals that stalled after a surge in bond yields and signs of mounting risk drove some investors to the sidelines.
At least seven such securitized bond offerings -- which bundle consumer debt -- were pulled in late February and early March as the war in Ukraine and the increasingly hawkish shift by the Federal Reserve rattled financial markets.
But the pace has since revived, with companies selling almost $3.9 billion of bonds this week, up from $450 million in the last week of February.
Affirm, a “buy now, pay later” lender, this week revived a $500 million deal that was delayed last month. The yields on the securities were lowered by 5 basis points from the initially proposed levels, according to a person familiar with the sale, with the A tranche pricing at 170 over the interpolated curve. This most senior tranche, a $400 million chunk that and had been almost entirely sold when the deal was pulled in March, was two times oversubscribed.
The short maturity of barely over two years likely helped to fuel demand, given that it's easier to gauge the risks of consumer lending over a shorter time frame. Such securities are also more insulated from the risks of rising interest rates than longer-term debt.
Read more: STRUCTURED WEEKLY: Allure of Short Duration Boosts ABS Demand
The collateral of most asset-backed deals, which are mainly different type of consumer loans, is still performing well, though there are some signs of rising strains as Americans are squeezed by inflation. In Affirm's case, inflation may increase demand for its loans, which allow consumers to break up purchases and pay them off in installments. The company has deals to offer its products to customers of retailing giants Walmart Inc. and Amazon.com Inc.
The Affirm sale follows an almost $820 million auto lease-backed bond from auto lender World Omni Financial Corp. was revived in early April after being put on hold in March when rates jumped. That deal was also rapidly sold, having launched in the morning of Apr. 5 and priced that same afternoon.
Other auto ABS deals have hit the market this month, including subprime transactions from Exeter Finance and Arivo, as well as prime auto ABS or rental-car deals from companies including Santander and Toyota.
But there are still signs of choppiness in the market. This week, the Canadian Imperial Bank of Commerce put on hold a roughly $540 million credit card asset-backed securities deal, citing widening spreads caused by market volatility, according to people with knowledge of the matter. The bond, backed by credit-card debt from Canadian borrowers, was set to receive AAA ratings for the most senior tranche, which accounts for $500 million.
Others that paused their issuance during the troubled weeks in March have not come back yet. Among them was a $1 billion bond offering from Tesla, backed by leases on its electric vehicles.
Relative Value: CLOs
- BofA strategists prefer CLO AAAs over investment grade corporates, as the former remain cheaper on an absolute and relative value basis. This is despite CLO AAA secondary spreads tightening by 3bps last week and corporates widening by 4bps, they said
- CLO AAAs are also cheaper than loans on a relative value basis, which indicates that the arbitrage will remain challenged in the short term, said the analysts
- However, CLO BBs have not changed much since mid-April
Quotable
Re: recovery bonds: “These types of deals are more corporate-bond focused,” said John Kerschner, head of U.S. securitized products at Janus Henderson Investors. “Securitized investors typically don't really play in the 20-year-maturity sandbox. We prefer short, amortizing, de-levering cash flows which reduce the overall risk.”
What's Next
ABS deals in the queue for next week include Automotive Credit Corporation (subprime auto ABS), Byrider (subprime auto ABS), Tricolor Auto Acceptance (subprime auto ABS), GM Financial (prime auto lease ABS), Octane Lending (equipment ABS), Ford (prime revolving auto loan ABS), Global Jet Capital (business aviation ABS), Pagaya (consumer loan ABS) and 25 Capital Partners (single family rental).
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