Second tier autos look for escape route

LONDON, Feb 10 (IFR) - Renewed rating pressures and a weak economic outlook for second-tier auto manufacturers could weigh heavily on funding costs, particularly in the light of the onerous redemption pipeline.

But some of those issuers facing these threats could find solace in the securitisation market where they already have programmes in place.

"You only have to look at where senior bonds from autos are trading, it is wider than ABS," a syndicate official involved in previous auto ABS deals said.

Low, or even unrated, issuers can benefit from securitisation in that it allows a scaling up of transaction ratings to Triple A. This is facilitated by analysis based on the underlying collateral performance and structural features such as reserve funds and credit enhancement rather than the quality of the originator alone.

These factors combine well for auto ABS to be considered one of the benchmark sectors in the current environment, and the benefits versus corporate debt pricing are clear.

Last month, Banque PSA, the financial arm of Peugeot, rated Baa1/BBB, printed a 2.5-year EUR650m corporate deal, and was forced to pay a new issue premium of around 60bp for bonds yielding 6.125%.

Its most recent ABS deal, Auto ABS 2011-2 from November, priced at Euribor plus 115bp and has tightened to around 100bp bid.

It was backed by German collateral, which tends to be the tightest market, but highlights the potential of ABS nonetheless. Its French deal, meanwhile, priced at Euribor plus 90bp last July and is still in that region.

A few days before PSA, RCI Banque priced a EUR700m 5.625% long three-year unsecured bond at mid-swaps plus 430bp, also paying a steep new issue premium of around 55bp-60bp. Its recent German auto ABS trades around 85bp over Euribor having tightened from 110bp in November.

FRENCH PROBLEMS

Renault and Peugeot both have sizeable redemption schedules - EUR4.5bn in 2012, EUR3.6bn in 2013 and EUR3.6bn in 2014 for the former and EUR2.9bn in 2012, EUR5.9bn in 2013 and a larger EUR10.2bn in 2014 for the latter.

These next three years account for 65%-70% of their total debt pile and dwindling car sales will only exacerbate the funding problems.

France posted a steep 20.7% decline in new car registrations from the prior year in January and CreditSights strategists have warned that a long overdue correction in the French market will likely set in soon, burdening the sector further.

"If we were to see further stress in the eurozone and a continued deterioration in car sales within the area, then the French manufacturers in particular may have to pay up to get issuance done," investment director at Scottish Widows Investment Partnership Luke Hickmore said.

This would contrast top-tier players from Germany. "Virtually any investor will choose a BMW bond over a Peugeot bond, a Volkswagen bond over a Renault bond and a Daimler bond over a Fiat bond," one syndicate banker said.

"It's easy to paint with broad brushstrokes and say that all autos are a safe investment, but in reality some credits in the sector could really suffer this year because they're over-supplied," he added.

There is a similar scenario in ABS. The second-tier names will not compete with market leader Volkswagen - VW bonds from the Driver and VCL programmes currently trade in the Euribor plus mid 50bp area - but printing in the region of Euribor plus 100bp is still more palatable than 400bp-500bp over mid-swaps.

ITALY UNDER PRESSURE

Macroeconomic pressures are putting carmakers in peripheral companies in a tight spot, with Italy particularly exposed. Standard & Poor's recently placed Fiat on CreditWatch negative chiefly because of its exposure to the cash-strapped domestic market.

The agency added that the economic environment would cause Fiat's European operating performance to deteriorate in 2012 - with the 16.9% decline in year-on-year registrations posted in January a warning shot.

One investor said that if Fiat were to be downgraded, it would struggle to access bank lending and would almost be forced to go to the bond market for funding. But with its five-year CDS spiking to around 750bp from 350bp in the last year, even this route is questionable.

"In that case, Fiat would have no bargaining margin and would have to put up with a market where the investor sets the price," an investor said.

Fiat was last in the bond market in July 2011 through finance arm Fiat Financial with a dual-tranche EUR1.5bn bond, consisting of a EUR900m 6.125% three-year tranche and a EUR600m 7.375% seven-year. Both the longer and the shorter parts of that bond have dipped below par since pricing, to be bid at around 99 and 95, respectively.

But the securitisation route for Fiat is by no means as clear cut as for Banque PSA or RCI Banque. Fiat's problem is that its domestic market is Italy - a jurisdiction where ABS spreads widened last year under the strain of sovereign debt worries.

And while there are signs of a recovery (Italian auto paper is very limited in supply, but RMBS by comparison is in the 350bp-400bp range from 500bp in January), a new issue is still not economically viable. It has, however, accessed the German market, most recently in October 2010 with A-BEST 5. ABS WELL SUPPORTED

Auto ABS in general is well-bid on a lack of supply, and investors are attracted to short bonds backed by granular portfolios. And this week alone two originators tested investor appetite for non-typical names.

Socram Banque, for instance, priced its EUR403m 2.3-year tranche of TitriSocram 2012-1 at Euribor plus 97bp from guidance of 100-105bp. This was its first issue with a revolving period, and the notes were more than twice covered.

Revolving periods do not appeal to all investors, as they allow originators to substitute loans in the pools, but they are being tested by more originators while those that already use them are extending their length.

And SG's unrated subsidiary BDK sold Red & Black Auto Germany 1. Its 1.5-year tranche printed in the middle of the Euribor plus 95-100bp guidance range at 97bp today and was upsized to EUR667.5m from EUR500m.

It is backed by a static pool which smoothed the path for the first-time issuer. And a debut deal from an unrated originator is a challenge that can be met more comfortably in the securitisation market than the corporate sector. (Reporting By Josie Cox and Anil Mayre, editing by Philip Wright)