Some companies pull back on securitizations as investors seek higher yields
Some companies tapping into the securitization market for cash are retreating as rising interest rates and the war in Ukraine push investors to demand higher yields.
Fintech lender Affirm Holdings Inc.
and car lender World Omni Financial Corp. are examples of companies that have recently withdrawn or delayed planned transactions.
Companies bundle certain types of consumer and commercial debt, such as car loans and credit card loans, into securities and sell them to investors. Issuance of such asset-backed securities in the United States fell 45% this year to March, to $79.4 billion, from the same period a year ago, according to data collected. by the Securities Industry and Financial Markets Association. This decline was largely due to lower issuance of corporate debt-backed securities. Other factors, such as a decline in loan issuance or consumer confidence, may affect overall issuance.
By comparison, U.S. corporate bond issuance fell 14% over the same period, to $521.8 billion, according to SIFMA.
Affirm, which specializes in buy-it-now, pay-later transactions, decided last month not to go ahead with a deal after determining it would not receive the price it wanted, said said Brooke Major-Reid, chief capital officer of Affirm. The $500 million deal would have refinanced existing debt, rather than provided new financing. Ms. Major-Reid declined to provide additional pricing details.
In recent years, Affirm has increasingly relied on securitizations to fund its rapid growth, seeing the market as a relatively efficient source of funding. As of December 31, Affirm had funded about a third of its $6.3 billion loan portfolio with securitizations. The rest was financed through a mix of direct loan sales and warehouse financing, in which the company borrows against its consumer loan balances.
“There’s no question the risk is being reassessed,” Ms. Major-Reid said, adding that demand for Affirm’s loans remains strong and the company will re-enter the market when it’s opportunistic.
Spreads, or the average incremental return over a benchmark rate, on asset-backed securities have widened since the start of the year and particularly over the past couple of months across different sectors, from credit cards car loans, and in particular for riskier consumer loans. Investors are weighing the impact of higher rates and whether they are taking on additional risk, for example, if the war in Ukraine is slowing economic growth or if rising inflation is affecting loan repayment rates.
For example, spreads on three-year triple-A bonds backed by auto loans with investment-grade credit ratings rose 0.33 percentage points between Feb. 3 and April 7, according to JPMorgan Chase & Co. , whose dataset largely covers the United States. consumer and commercial securitizations that are rated by at least one rating agency. Over the same period, spreads on three-year triple-B bonds backed by subprime auto loans rose 0.50 percentage points, according to JPMorgan.
World Omni Financial, an auto finance company, launched and priced a $926.5 million securitization earlier this month which it decided in mid-March to restructure following a sharp rise in Treasury yields, said Eric Gebhard, group vice president of finance and treasurer of JM. Family Enterprises Inc., parent company of World Omni. Government bond yields hit multi-year highs last month, reflecting investor expectations for further interest rate hikes from the Federal Reserve.
The transaction “was delayed because the sharp rise in benchmark rates rendered the securitization structure ineffective,” Gebhard said, noting that the restructured deal provides investors with risk protection. The company has always intended to re-enter the market after closing the deal last month, he said.
Firms that regularly use the securitization market are reassessing whether now is the best time to do so amid weaker investor demand compared to previous quarters, said Richard Bianchi, managing director of global business development at DBRS Morningstar, a rating company. “Right now the investor base is a bit shallow – there’s not as much money looking for deals,” Bianchi said, speaking broadly of the market.
While big lenders have other financing options at hand, some smaller lenders that rely on securitizations are looking for the right time to strike a deal, Bianchi said.
Investors are becoming more cautious and scrutinizing macro-level risks, including late payments on some types of consumer loans which are starting to rise, albeit from historic lows earlier in the pandemic when people used stimulus funds to increase their savings and pay down their debt, said Adam August, vice president of the securitized products group at TCW Group Inc., an investment company.
“The winds are changing,” Mr. August said. TCW has not made any significant adjustments to its investment strategy, he said.
Lender SoFi Technologies Inc.
began to rely less on the securitization market ahead of its latest volatile run, chief executive Anthony Noto said at a March 22 investor conference. The company, which received a banking charter earlier this year, funds its loans with deposits, whole loan sales and warehousing facilities, Noto said. SoFi does not publish information on the volume of loans it securitizes or sells, or the breakdown of funding sources it uses.
“We take advantage of this market if the pricing is right,” Noto said at the conference, referring to securitizations.
Write to Kristin Broughton at [email protected]
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