Salomon Brothers, which dominated underwriting activity in 1984, is purchasing, packaging and selling automobile loans in what could be the start of a multibillion-dollar secondary market for car loans.
Salomon Brothers Vice President Thomas A. Kendall said yesterday that while he did not think the size of the market would approach the secondary mortgage market, institutional investors have responded enthusiastically to opportunities to purchase certificates that represent packages of car loans. Kendall said Salomon Brothers has been proceeding as quietly as possible with the program to maintain an edge over other investment bankers.
Salomon has named the certificates CARS, Certificates for Automobile Receivables. According to a story published in Corporate Financing Week yesterday, two major institutions in the Boston area reportedly have said they would buy $400 million to $500 million of CARS.
"Liquidity has become a big issue and this provides liquidity for car loans," Kendall said. "Finance companies having capitalization problems, as well as banks and thrifts who are coming under fire with respect to their lack of capital, could convert the auto loans they hold to cash."
Kendall said the development of a secondary market for car loans could provide advantages to car dealers, who might be able to obtain cheaper financing. He said it would prevent car dealers in a single area from being locked out of the market if area banks decided to cut back on car financing.
To date, Salomon has sold the CARS privately, but there are signs that a public market may emerge, as more companies take advantage of yet another way for them to tap the capital markets.
One observer said institutional investors "would kill for these things. Auto loans would be like insured instruments which would guarantee against defaults. And for specific car dealerships, they could finance inventories cheaper than if they had to borrow at the bank for prime-plus-one."
Corporate Financing Week said the CARS give institutions the chance to buy high-quality paper that is priced about 25 to 30 basis points above Treasury bills. One hundred basis points equals one percent.
Sources also told CFW that one of the giant automobile credit subsidiaries has indicated an interest in the origination of $5 billion to $6 billion of notes annually.
"The experience with these loans is better than with home mortgages," Salomon's Kendall said. "Although it is argued that people will give up their home last, they seem to hold onto their cars even longer than their homes."
Kendall said the technique is part of an older concept that focuses on ways to create liquid securities out of receivables. "This formalizes that concept," he said. "It is going to allow you to [sell] to institutions that normally would not be buyers. . . . If anything, you would not need 100 percent insurance on these due to the quality of the underlying assets. . . . It affords banks and finance companies with a very competitive outlet for the [loans] they hold."