Refurbished auto loans seem like an unlikely place for crippled credit investors, but they are outperforming and issuance is at a multi-year high.
The companies have sold more than $58 billion in asset-backed securities backed by auto loans this year, about 20% more than at this point in 2021. Santander Consumer and First Help Financial have both offered deals this week, while Carvana Co. — the online used-car seller whose junk stocks and bonds have plunged — plans to sell $605 million of debt next week.
“Auto ABS is now one of the safe havens in structured credit,” Tracy Chen, portfolio manager at Brandywine Global Investment, said in a phone interview.
Asset-backed securities can take a beating during an economic downturn as consumers are laid off and fail to repay their debt. During the financial crisis, securities were particularly hard hit when the housing bubble burst and debt-related obligations, including second mortgages and home equity loans, headed south.
But auto loan debt is ultimately backed by cars, including loans made to subprime borrowers. Prices for new and used vehicles are on the rise, with new and used vehicle prices up 14% year-on-year, in part due to chip shortages, according to data from the consumer price index in the United States and the Manheim index. Used car prices have fallen in recent months, but new vehicle prices continue to rise.
Additionally, bonds typically mature within a few years, and with an unemployment rate of just 3.6%, investors are willing to bet that consumers will continue to repay their short-term borrowings.
The highest-rated, AAA bonds that most investors buy have built-in safeguards, such as lower-rated parties that are the first to absorb losses.
“It has a short duration with rapid deleveraging, it is much improved, and used car prices are still favorable, despite the recent normalization,” Brandywine’s Chen said.
Auto asset-backed assets fell just 2.6% overall this year through Thursday after factoring in price movements and interest payments, while investment-grade corporate bonds fell lost nearly 13%, according to data from the Bloomberg index.
Even so, companies are paying more to borrow, as inflation rages and the Federal Reserve raises rates. Santander Consumer’s latest deal featured a AAA-rated portion, A-2 securities, which ends payouts in March 2025 and yields 2.78%. In February, a similar stock returned 1.37%.