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Yield-hungry investors scoop up railcar ABS
April 12, 2013 / 4:06 PM / 5 years ago

Yield-hungry investors scoop up railcar ABS

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 six-year tranches.

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) 2013-1.

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 six-times subscribed.

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 USD22.6m.

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 transactions.


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 to investors.

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%, respectively.

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 rangebound.

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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