Primary:

The ABS primary market was in full force during the month of September with over $29 billion pricing across 41 deals vs. $23bn in September 2019. In fact, it was the highest issuance number for a September since 2007. From the extremely low cost of funds to issuers’ desire to bolster their balance sheets, to improving fundamentals and investor demand for yield, market conditions provided the perfect storm for deals to be announced, heavily oversubscribed, upsized and priced inside initial guidance. In addition to the aforementioned reasons for the increase in supply, we suspect issuers are looking to price deals before the election and thus there may also be an element of a supply pull forward. YTD $151bn has priced, down 18% year over year.

During the month, auto-related issuance continued to be the main source of primary supply with over $15bn pricing. All types of auto issuance came to market from prime and subprime auto deals to auto lease and dealer floorplan transactions. Primary spreads on AAA autos have retraced back to pre-Covid levels with average last cash flow (LCF) AAA spreads in the 20-25 basis points (bps) range for prime and 30-40 bps for subprime deals. Subordinate auto spreads still have some retracement left but are quickly approaching pre-Covid levels. BBB tranches from subprime auto deals tightened to +140 bps from larger issuers vs. +110 earlier in the year. The basis between senior and subordinate auto spreads also narrowed from 150 bps to 110 bps, closely approaching pre-Covid basis of 100 bps.

Container ABS issuance continued at its torrid pace from August with over $3.4bn pricing across five deals with average spreads between 175-190 bps on the single A tranche. YTD $6bn of container ABS has been issued vs. $0.7bn in all of 2019. Issuance increased this year as container issuers took advantage of the low rate environment to refinance many of their outstanding deals with coupon cost savings averaging 1-2%. In addition, fundamentals held firm with lease rates stable as a shortage in the supply of container boxes coincided with high utilization rates from a pickup in global trade.

Private student loan issuance is also up over 18% year over year as low rates incentivize borrowers to refinance their outstanding student loans. In addition, TALF eligibility and improving fundamental performance helped to keep demand strong. YTD student loan issuance of $13bn has already surpassed total volume for 2019. September pricing spreads ranged from 50 bps to 115 bps on the AAA rated tranche depending on duration and issuer.

Notably absent during the month was credit card issuance where only $2.5bn has priced year to date. That is down almost 90% year over year as banks are finding deposit funding more attractive than securitization for their credit card receivables due to the rate environment. Aircraft ABS issuance is also down 65% year over year as air travel has declined since Covid.

Source: Bloomberg, TCW

TALF Update:

The TALF program has now had seven subscription dates since the start of the lending facility in June. To date, a total of $3.2bn in loans have been requested from the facility, with the majority for Small Business (SBA) securitizations (55%) and CMBS (34%). Notably, only 11% of loans have been requested to finance eligible consumer ABS bonds with only the private student loan and insurance premium finance sectors receiving requests.

TALF Loans Settled by Sector

Source: Federal Reserve, TCW

The two main reasons for the small amount of TALF loans requested within consumer ABS are that 1) issuers are deciding to forgo TALF eligibility as there is plenty of demand for their deals away from TALF investors and 2) spreads for TALF-eligible ABS are lower than the cost of funding the TALF loan (OIS + 125), which results in negative returns for the TALF borrower.

In essence, the announcement of the TALF program in and of itself has provided enough of a tailwind for ABS spreads while also establishing a good backstop in the event spreads widen in the near future.

Secondary:

Spreads were firm for most asset classes throughout the month with flow spreads a touch softer by month end due to the extremely heavy supply in primary. Despite the softness, spreads in many sectors have retraced back to pre-Covid levels with the exception of a few credit risk sectors such as subprime auto subs, consumer unsecured and first-order Covid-affected sectors such as rental car, rail and aircraft.

Source: Bank of America/Merrill Lynch

Monthly trading volumes increased slightly to $21bn vs. $18bn in August. Quarterly trading volume declined to $62bn from $71bn in the third quarter. Although dealers net added in ABS over the month, dealer inventory remains at multi-year lows.

Monthly ABS TRACE Volume

Source: FINRA, Bloomberg, TCW

Fundamentals:

Overall, fundamentals in consumer ABS continue to improve as relief programs, such as the CARES act, stimulus from the Fed and various servicer enacted forbearance/extension deferrals, have kept defaults and delinquencies low. In addition, the financial health of most consumers continues to be healthy as the U.S. personal savings rate remains high, at 14% (vs. a 10-year average of 8%), with consumers more likely to use government stimulus payments to save and pay down debt.

Credit Card:

Credit card performance was stable with chargeoffs slightly higher, but delinquencies lower and excess spread higher. As per Citibank’s credit card tracker data:

• Chargeoffs increased 10 bps to 2.31% m-o-m, and is down 8 bps YTD
• 3 month average excess spread increased 25 bps m-o-m to 14.54% and is 10 bps lower YTD
• Monthly payment rate dropped 47 bps to 28.85 and is down 1% YTD

Source: Citi Research

Auto:

Prime and Subprime Auto performance was mixed as 30+ delinquencies ticked up slightly month over month (but lower Y-o-Y) as consumers left deferral programs and re-entered regular payment status; however, default and loss rates were lower:

• The Prime Auto 30+ delinquency rate increased by 25 bps month over month to 1.17% while annualized net loss rates decreased 10 bps to 0.26%
• The Subprime Auto 30+ delinquency rate increased 107 bps to 10% while the annualized net loss rate decreased 25 bps to 2.86%

Source: BofA Merrill Lynch Global Research

The main reason loss rates were lower was due to higher used vehicle prices with the Manheim Used Vehicle Index up 16% year over year. Limited inventories and low production rates have been supportive of car prices. In addition, demand has been high with September auto sales coming in at 16.3mm, the highest SAAR since February of this year.

Also supportive of fundamentals is the declining rate of new borrowers entering modification. As per S&P, the percent of prime loans in active extension status was 1.48% in July vs 3.65% in June. The percent of subprime loans in extension was 12% in July vs. 16% in June.

Student Loans:

Private student loan fundamentals outperformed FFELP loans with delinquencies and defaults moving lower from August:

• FFELP 60+ delinquencies increased slightly to 2.61% from 2.51% in August but remain at multi–year lows as the percentage of borrowers in forbearance / deferment increased to over 20% in the second quarter vs. 13% in Q1 2020. To note, borrowers in forbearance / deferment are no longer considered delinquent.
• Private-credit student loan delinquencies declined 6 bps to 0.6% with loss severities at multi-year lows of 56%.

Student Loans: 60+ Delinquency Rates (%)

Source: Morgan Stanley

Consumer Loan

Consumer loan performance continues to stabilize and improve as delinquencies trend lower. According to Fitch’s U.S. Marketplace Loan Monitor, 60+ delinquencies declined 30 bps to 1.42% in July. Although defaults increased slightly from June, year-over-year defaults are down 80 bps to 8.34%. Much of the positive performance can be attributed to fiscal support for households, including expanded unemployment insurance payments. In addition, many servicers granted loan deferrals, which reached almost 20% in many ABS collateral pools. However, with the outlook uncertain for additional fiscal stimulus and as forbearance terms (typically 2-3 months) expire, we remain cautious on performance going forward.

Source: Fitch Ratings, Fitch Solutions, Index