Floorplan ABS benefits from risk-on approach

Fri Feb 8, 2013 2:45pm EST

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Feb 8 (IFR) - A single-minded focus on yield is pushing investors towards non-traditional ABS and even prompting them to take on more risk than they usually would.

Navistar Financial's US$200m securitisation this week found strong demand and was priced tightly despite specific concerns relating to the credit. The deal is backed by revolving floorplan loans that are extended to automobile dealers to finance auto and light trucks inventory at a wholesale rate.

The deal was a key test of investor sentiment for the name. It came after the company replaced key executives; it is now launching revamped trucks with new engine technology.

Navistar is a maker of international brand commercial trucks, diesel engines, and school and commercial buses. Under its previous management, it developed in-cylinder emissions technology intended to provide its engines with a competitive advantage, but the Environmental Protection Agency refused to certify the technology, S&P said in a report.

Navistar's fallback approach now relies on purchased Cummins engines and emissions technology.

"We consider it unlikely that Navistar can be profitable in the near future, but we assume that significant improvement will be evident by the third quarter of fiscal year 2013," S&P said.

This prompted questions from investors during the roadshow for the company's latest ABS, but did not deter demand.

"There are not many issuers of equipment floorplan ABS out there, so there was some scarcity for the product," said one banker.

"The credit enhancement on the Class A was 25%, which is pretty high compared with about 2.5%-3% on prime auto ABS, given there are zero defaults of floorplan ABS."

There were also default triggers in the structure.

Investor response ensured that the company issued a Triple B rated tranche for the first time, and pricing levels across the tranches were much tighter than on Navistar's previous trade in October 2011.

The structure consisted of Triple A, Double A, Single A and Triple B rated notes with tenors of 1.95 years. Pricing was set at one-month Libor plus 67bp, 100bp, 150bp and 225bp. These levels were about 5bp-8bp tighter than guidance levels and about 25bp-50bp tighter than the 2011 trade. Bank of America Merrill Lynch (structuring lead) and Credit Suisse were the joint leads.

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