Friday, January 15, 2010

Asset-Backed Debt Revival in Europe Led by Ford, BMW

Original posted on Bloomberg by Esteban Duarte and Jody Shenn:

Europe’s asset-backed bond market, dormant for a year, is coming back to life as Bayerische Motoren Werke AG and Ford Motor Co. sell more than 1 billion euros ($1.45 billion) of debt backed by automobile loans and leases.

BMW, the world’s biggest luxury car maker, is selling 742 million euros of bonds backed by German auto leases, said a banker with direct knowledge of the deal. Dearborn, Michigan- based Ford sold 300 million euros of debt tied to car loans on Jan. 8.

The revival in debt backed by consumer and business payments in the auto industry shows improving investor sentiment as Europe emerges from the recession. Yields on company bonds averaged 4.13 percent yesterday in New York, down from 4.37 percent at the start of the year, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index.

“If BMW is successful, it would be a really good indicator for other issuers now monitoring the market,” said Markus Ernst, a credit analyst at UniCredit SpA in Munich. Borrowers testing the waters is “definitely a good sign as it underlines that the market is not drying up,” he said.

Sales of asset-backed bonds in Europe may rise to 50 billion euros this year, from 8 billion euros in 2009, according to Gareth Davies, a debt analyst at JPMorgan Chase & Co. in London. The region’s securitized credit market has been slower to recover than in the U.S. because there’s no equivalent to the Federal Reserve’s Term Asset-Backed Securities Loan Facility, which provides low cost loans to investors buying the bonds.

Yield Spreads

Elsewhere in credit markets, global corporate bond yields remained 1.61 percentage points higher than Treasuries, unchanged from Jan. 12, according the Bank of America index, which tracks almost 8,500 bonds around the world.

Premiums on bonds in developing countries narrowed to 2.67 percentage points from 2.70 percentage points yesterday, approaching the 19-month low of 2.64 points reached on Jan. 11, according to the JPMorgan Emerging Markets Bond Index Plus.

U.K. pay-television company Virgin Media Inc. sold $2.4 billion of first-lien bonds in dollars and pounds at its lowest rates ever after tripling the size of the deal.

Freddie Mac is offering securities in the U.S. derived from loans on apartments as it gains a larger role in financing multi-family properties.

BMW Bonds

BMW’s asset-backed deal is its first in Europe since before credit markets seized up in mid-2007. The offering is made up of notes rated AAA with an average life of 1.88 years, according to the banker who declined to be identified because the terms haven’t been set.

Officials from Munich-based BMW will meet with investors in cities including London and Paris between Jan. 15 and 22. Societe Generale SA and WestLB are managing the transaction and the notes will be issued through Bavarian Sky SA, Compartment 2, said the banker.

Ford, the only major U.S. automaker to avoid filing for bankruptcy last year, issued AAA rated securities last week in Europe in a deal managed by HSBC Holdings Plc. The notes, sold through Ford’s Globaldrive Auto Receivables 2008-B B.V. unit, yielded 165 basis points, or 1.65 percentage points, more than swap rates.

Assets Shunned

The market for bonds backed by real estate, consumer debt and corporate loans slammed shut in 2007 as the worst credit crisis for decades caused investors to shun hard-to-value assets. About the only sales have been of mortgage securities that can be used as collateral for European Central Bank loans.

The yield over benchmark rates that investors demand to hold top-rated U.K. five-year mortgage-backed securities surged as high as 4.25 percentage points a year ago, JPMorgan data show. The spread on the securities, which are the most easy asset-backed notes to buy and sell in Europe, has now dropped to 1.1 percentage point.

Now, signs that growth in the global economy is gathering pace also helped push the extra yield, or spread, that investors demand to buy senior two-year bonds backed by European car loans down to 1.1 percentage points more than benchmark rates, the narrowest spread since August 2008, according to JPMorgan.

Confidence in the world economy rose as an acceleration in manufacturing and service industries signaled a sustained recovery from last year’s recession, according to a Bloomberg survey of users on six continents. The Bloomberg Professional Global Confidence Index gained to 66.6 this month from 58.9 in December, reaching the highest level since the series began two years ago. The index exceeded 50 for a sixth month, which means there were more optimists than pessimists.

Consumer Debt

Sales of asset-backed securities from consumer debt in Europe last year compare with about $178 billion in the U.S., according to Bank of America. Most of the offerings in America, or $105 billion, were facilitated by the Fed’s TALF program.

Ford took advantage of that program last week to sell $1.25 billion of bonds backed by loans that finance cars on dealer lots. The top-rated bonds were priced to yield 165 basis points more than the one-month London interbank offered rate.

Virgin Media’s bond sale was split between dollar- denominated debt that priced to yield 6.75 percent and pound notes yielding 7.25 percent, the lowest rates Virgin has paid on corporate securities, Bloomberg data show. The 875 million-pound portion is the biggest-ever issue of high-yield, high-risk debt in U.K. currency.

Financing ‘Tight’

“With bank financing likely to remain tight throughout 2010, more and more new issuers will no doubt try their luck in the high-yield bond market,” CreditSights Inc. analyst David Watts in London said yesterday in a report to clients.

Virgin Media’s $1 billion of 8-year, 6.5 percent dollar debt were priced to yield 3.25 percentage points more than Treasuries. The 8-year, 7 percent notes in pounds paid a spread of 3.4 percentage points over gilts. The company last sold bonds in sterling in November, issuing 350 million pounds of unsecured 8.875 percent notes due in 2019 that paid a spread of 5.35 percentage points, Bloomberg data show.

Freddie Mac, the mortgage-finance company with U.S. government support, is marketing about $1.1 billion of bonds backed by loans on multi-family properties.

The debt, one of at least six such issues planned this year, is likely to price around Jan. 27, the McLean, Virginia- based company said yesterday. Investors will be shielded against defaults on the underlying mortgages by both a Freddie Mac guarantee and credit protection created by the deal’s structure, the company said.

Mortgage Securities

Freddie Mac and Fannie Mae, which is also under government control, gained larger roles in the market for financing apartments after demand for private commercial-mortgage-backed securities collapsed as property prices fell. Sales of private U.S. commercial-mortgage bonds totaled $1.4 billion last year, compared with the record of $237 billion in 2007, Bloomberg data show. In 2009 Freddie Mac sold $2.1 billion of similar securities.

“Given our pipeline we expect to come to market every other month throughout 2010 with new deals, and thereby continue to provide greater liquidity to the multi-family housing market,” David Brickman, Freddie Mac’s vice president of multi- family and CMBS capital markets, said in a statement.

Fannie Mae plans to sell three-year benchmark notes today, the Washington-based company said yesterday in an e-mailed statement. The size of the offering, its first since the Treasury Department’s Dec. 24 announcement of an expansion of its capital backstops and portfolio limits for Fannie Mae and Freddie Mac, wasn’t disclosed.

Spreads Narrow

The sale comes as spreads on bonds of the mortgage companies narrows. Freddie Mac sold $4 billion of five-year reference notes that mature Feb. 9, 2015, at a price to yield 2.88 percent, or 27.5 basis points more than Treasuries. In June, the company sold five-year notes at 3.054 percent, a spread of 41.3 basis points.

Average premiums on so-called agency debt -- mostly from Fannie Mae and Freddie Mac, government-chartered Federal Home Loan Bank system, and banks that sold Federal Deposit Insurance Corp.-guaranteed bonds -- have narrowed 4 basis points since Dec. 24 to 27 basis points yesterday, according to Barclays Capital Inc. index data. That compares with the record high of 180 basis points reached on Nov. 20, 2008.

No comments: