Subprime jewelry loans join assets in ABS binge
Investors in the asset-backed securities market are seeking relief from record-low yields by snapping up riskier securities tied to jewelry loans and cars parked on dealership lots.
Springleaf Finance Corp., the lender to borrowers with poor or limited credit, sold $604 million of bonds last month backed by personal loans secured by household goods from furniture to electronics, its first such deal, offering documents show. World Omni Financial Corp. is marketing $350 million in floorplan debt, which finances vehicles prior to sale and generally carries more risk than loans to consumers, said a person familiar with the offering, its first such deal since 2009.
Demand for riskier asset-backed bonds has grown as the Federal Reserve holds its benchmark interest rate at almost zero for a fifth year. Sales of securities linked to subprime auto loans doubled to $4 billion in January from a year earlier, Bloomberg data show. Loans to subprime borrowers fueled the bubble that caused the U.S. housing crisis in 2007 and 2008.
"The ever-increasing demand for higher-yielding investments has resulted in new issuers and an evolving array of transactions coming to the ABS space," said Harris Trifon, a debt analyst at Deutsche Bank AG in New York. "What started out in interest in subprime has broadened out to personal-finance loans and everything in between."
Issuance of the notes tied to consumer and business borrowings are forecast to jump 7 percent to $180 billion this year, according to Wells Fargo & Co. Offerings linked to auto debt are the largest segment of the asset-backed market, accounting for $12 billion of $22 billion of the bonds sold this year, data compiled by Bloomberg show.
Springleaf's offering backed by personal loans paid a spread of 210 basis points over the benchmark swap rate on a A- rated portion maturing in 2.47 years, Bloomberg data show.
Average yields for top-ranked asset-backed bonds tied to auto loans are about 5 basis points more than a record-low 50 basis points, or 0.5 percentage point, in October, Bank of America Merrill Lynch index data show.
Companies also are reaching into areas of the market they previously hadn't.
Ally Financial Inc., the former finance arm of General Motors Co., last month sold $940 million in notes linked to subprime loans, the first such deal by the Detroit, Michigan- based lender, Bloomberg data show.
Elsewhere in credit markets, Revel AC Inc., the casino owner that New Jersey Governor Chris Christie bet on to revive Atlantic City, plans to file for a prepackaged bankruptcy that will reduce its debt burden by more than $1 billion. Morgan Stanley, the biggest financial brokerage, is planning to offer its second benchmark-size bonds this year.