April 12 (IFR) - US ABS investors seeking out higher returns
through duration and diversification got what they wanted this
week via an off-the-run railcar-lease deal that offered two rare
With expectations that interest rates will remain low for an
extended period of time - and spreads continuing to tighten on
mainstream ABS - the buy-side is willing to accept some
additional risk in non-traditional sectors for a bit more yield.
This week, Flagship Rail Services, formerly known as AIG
Rail Services, priced its inaugural USD335m railcar-lease ABS
offering, a 144A trade titled Flagship Rail Services (FRS I LLC)
The deal offered two tranches with six-year weighted average
lives - a longer duration than most ABS transactions, offering
investors higher yields than typical on-the-run issues.
The Single A rated A-1 and A-2 tranches of the Flagship rail
deal included tenors of 3.1- and six-years, respectively, with
credit enhancement levels of 23%.
Price guidance was released at interpolated swaps plus
140bp-150bp and plus 200bp area.
Investors proved keen and respective pricing levels came
tighter at 130bp and 195bp, for yields of 1.811% and 3.1%.
The 3.1-year slice was roughly 5.5 times subscribed while
the six-year tranche was 1.7 times covered.
The Triple B rated six-year class B had 13% credit
enhancement and was heard whispered in the mid 300s before talk
of interpolated swaps plus 325bp area and final pricing at
285bp. The yield was set at 4% and the tranche was a whopping
The deal was broadly distributed and exceeded underwriter
expectations with around 60 orders in the book. Wells Fargo
(structuring lead) and Deutsche Bank led the deal.
The collateral consisted of an approximately USD359.6m
portfolio containing 5,541 railcars and a pre-funding account of
According to S&P, as of January 31, 2013, Flagship's managed
fleet consisted of approximately 14,502 railcars with a 98.6%
fleet utilization rate.
The railcar company, formerly owned by AIG, was bought by
Perella Weinberg Partners in April 2011 as part of an expansion
of the asset management company's Asset Based Value strategy.
A completely separate division of Flagship, auto lender
Flagship Credit Acceptance, also tapped the ABS market this week
with a subprime auto deal. Flagship Credit was bought out by
Perella Weinberg in 2010.
Both divisions of Flagship declined to comment on their
SEARCH FOR SPREAD
In such a tight spread environment - particularly for prime
auto ABS, which comprises the majority of the asset-backed
sector - non-traditional asset classes can be quite attractive
While auto transactions, most notably short-term Triple A
rated prime retail offerings, continue to print at a robust
pace, the sector is known for being more of a cash substitute
than yield producer.
For instance, a prime auto ABS from Toyota this week offered
1.05-, 2.10- and 3.20-year Triple A slices, which priced at EDSF
plus 5bp, interpolated swaps plus 16bp and interpolated swaps
plus 18bp, respectively.
Yields were minuscule, at 0.372%, 0.551% and 0.7%,
Even benchmark subprime auto issuer names such as
AmeriCredit have seen spreads inch closer to prime levels. Last
week's AMCAR 2013-2 series offered Triple A notes with tenors of
0.99- and 2.21-years, which priced at EDSF plus 20bp and
interpolated swaps plus 24bp with yields of 0.533% and 0.660%.
While quarter-end pressure and repositioning caused some
widening at the end of March, spreads still remain mostly remain
In a recent note to clients, Bank of America ABS strategists
said: "We look for spreads to move to tighter levels over the
next few weeks, as benchmark issuers return to the new issue
market and, even though the employment report for March was
disappointing, we expect only modest weakness in credit
statistics over the course of the year."
The team reported that senior classes in the auto and credit
card ABS sectors have already tightened by 3 to 5bp in the first
week of April.
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