Thursday, November 6, 2008
Bond Woes Choke Off Some Credit to Consumers - WSJ
--Bond investors' unwillingness to take ABS help explains credit remains tight in auto, credit card, & student loans. Sales/revenue from these sectors will be crimped too. --Because banks could not sell their holdings of these types loans, they have to cut credit to other business lines too. Hence, this will impact overall credit market. --In terms of market size, less half of ABS's 2.5 tril will go to these types of underlying securities. So the market size is around $1 tril. If 40% is impacted, this translate into $400 bil clogged money flow for overall credit market. Banks and other finance companies making loans for autos, credit cards and college tuition are having virtually no success in selling those loans to other investors, a potent sign of just how tight credit markets remain. The market for selling such loans -- by packaging, or securitizing, them into bonds -- had just one $500 million deal for all of October, according to Barclays Capital. That compares with $50.7 billion worth of deals made one year earlier, according to market-research firm Dealogic. The overall market for so-called asset-backed securitization is estimated at $2.5 trillion. This creates repercussions for lenders and consumers alike. Banks and other finance companies are stuck holding more loans on their balance sheets, which crimps their ability to offer new loans. That, in turn, shrinks available credit for consumers, who need it to finance an education, buy a new car, or pay for household expenses using a credit card. Banks were already reining in lending to customers as they try to reduce exposure to loans that may ultimately go unpaid. For years, the asset-backed securitization markets fueled the explosion in consumer borrowing, as it allowed lenders to spread their risk to other investors such as pension funds, hedge funds and insurers. But the securitization pools have dried up after losses in the mortgage markets, where risk was also widely dispersed via securitized bonds. The October dry spell has caused year-to-date securitization volumes to drop. Credit-card volumes are down 31%, auto loans are off 45% and student loans have fallen about 41%, according to Barclays. October's sole transaction came from AmeriCredit Corp., which provides auto loans to less creditworthy borrowers. "We are at a standstill," said Craig Leonard, a structured-debt syndicate banker at Barclays Capital said. The deals that are getting done are also more expensive for the banks. At the end of October, the risk premium charged on a triple-A rated credit-card deal reached 4.67 percentage points over comparable two-year Treasury yields, up almost 3.2 percentage points from June, according to J.P. Morgan data. Even through June of this year, securities backed by student loans and credit-card debt remained popular with investors. But investors already burned by sinking bond valuations are likely to stay clear of these markets, because of the downturn in the economy and expected increase in job losses. "If you really need these markets for financing, this is another pain in the neck," said a senior executive at one big bank. Banks, in turn, are trying to wean themselves from the securitization markets. They're turning to other financing such as certificate of deposit programs, but those can be costly. The market shutdown is particularly bad news for non-bank finance companies. The ability to sell off car, education and auto loans is critical to companies such Ford Motor Co.'s Ford Motor Credit, American Express Co. and student lender SLM Corp., or Sallie Mae. Without securitization markets, they have less capital to make new loans to consumers. Worries about the credit environment helped push financial shares lower on Wednesday. American Express shares were off 6.67%, while SLM shares lost 8.4%. Unlike traditional banks, finance companies typically don't have access to customer deposits to fund their loans. In recent weeks, however, the government's financial bailout package has provided these companies with new financing options. Mr. Leonard of Barclays said he expects to see only sporadic bond deals through the end of the year, depending on the profile of the companies seeking capital. But the expectation is that this is not permanent." Ultimately, plain-vanilla credit-card securitizations will come back," said the senior bank executive.