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Ford sets new template for rule-compliant ABS
January 18, 2017 / 10:39 PM / 8 months ago

Ford sets new template for rule-compliant ABS

NEW YORK, Jan 18 (IFR) - Ford Motor Credit helped reopen the dormant asset-backed securities market this week after selling the first ever public bond to fully comply with post-crisis regulations.

Investors piled into the long-awaited US$1.57bn deal that bankers now hope will provide a blueprint for other auto issuers who have been waiting on the sidelines since the new regulations came into effect late last year.

“All of the classes were one to two times oversubscribed,” said Jennifer Thomas, a vice president in the fixed-income unit of Loomis, Sayles & Company.

“Overall, it’s a positive,” she told IFR.

“I think most issuers will likely follow what Ford does.”

Ford’s trade is the industry’s first public ABS deal to meet both the Dodd-Frank Act’s risk retention rules and additional loan level disclosures required by the US Securities and Exchange Commission.

The rules aim to better align the interests of bond sellers and buyers, while putting more information in the public domain about the quality of loans backing such deals.

One hurdle for issuers has been pulling the large amount of data together.

A typical auto ABS deal is backed by tens of thousands of auto loans. Some issuers had been asked to shrink the size of their files to upload them to the SEC’s website, an attorney working with issuers told IFR.

The reams of raw data now available on the Ford trade looked “like The Matrix, the movie,” one ABS banker said.

Bankers flagged Ford as the likely candidate to bring the first such deal late last year, not least because it is known for its high collateral quality and liquidity.

Now the hope is it would spur others to consider following the same path.

Less than a handful of deals have come to market in the past month - all of them private deals - as many issuers rushed to sell issues before the new rules took effect in late November and December.

Ally Financial, CarMax, Santander Consumer USA and Flagship Credit Acceptance have recently filed notice of their plans to issue ABS with the SEC.

Enterprise Rent-A-Car has mandated banks for a private deal.

CarMax is expected to offer its notes in a public format that complies with the new rules, according to a banker familiar with the matter.

“I do think there were some people waiting to leverage off what Ford disclosed,” another ABS banker told IFR.

“The tone is good, and we have a good pipeline for early February and late January.”

POSITIVE TONE

The dearth of supply played to Ford’s advantage, and was partly attributed to the tight pricing on the trade.

At least one class priced a dramatic 25% tighter than the carmaker’s prior ABS deal in October.

The US$135.5m class of 3.25-year Triple As cleared at 23bp over interpolated swaps, according to pricing details viewed by IFR. That was at tight end of an initial 23bp-26bp range of talk, and 5bp less than similar notes sold by Ford last fall.

But while the deal’s success was applauded by both rival bankers and investors, some said other issuers will instead opt to issue bonds in a private format to avoid the costs, time and upkeep of the public data requirements.

“It’s a lot of data,” said Philip Armstrong, an associate portfolio manager at Invesco, about Ford’s public disclosures.

“When you start to move away from Ford to less programmatic issuers, I think that will be more telling.”

For some, the rules will also require issuers to publicly provide the market - for the first time - an estimate of the value of their retained notes.

That may be a sticking point for issuers that securitize riskier collateral where losses are expected to be higher than, Ford’s typical collateral, for example.

“I think Ford was a big deal for some,” said Chris Gavin, a structured finance attorney at Cadwalader, Wickersham & Taft.

“A lot of people have ideas [about compliant structures] they have been kicking around, but now it’s final decision time.”

Citigroup structured the Ford trade, and acted as joint bookrunner with BNP Paribas, Bradesco, Goldman Sachs and Societe Generale. Ford did not respond to a request for comment. (Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Shankar Ramakrishnan)

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