Bank of England shadow on auto securisation deal
Consumer spending concerns in the UK are making investors cautious about the newest wave of bonds sold on the basis of car loans.
Ford Credit Europe has recently made available a new securitisation deal based on around £542m of financing contracts. It involves tradable bonds created from auto loans.
However, car finance and consumer lending in general have come firmly under investigation thanks to concern expressed by The Bank of England.
Bank of England Consumer Credit Alarm
UK lenders have been tasked with providing stronger evidence that consumer credit is being properly managed and controlled.
The Bank of England has singled out two particular areas that need closer scrutiny.
This includes the way in which credit card companies attract lending with a promise of 0% interest. The Bank of England stated this means lenders become “dependent on long-term 0% promotional offers (including balance transfers) to attract new balances”, leaving them vulnerable.
The second area of concern is motor finance. The Bank of England has highlighted that it is becoming increasingly common to use Personal Contract Purchase (PCP) deals. This means cars are leased for a specific time period, then the lender takes ownership of the vehicle.
There is concern that market fluctuations could leave lenders with a surplus of used cars to dispose of.
Concern About Car Loan Bonds
PCP contracts are the principal form of loan underpinning the Ford Credit trade. So the deal involves a belief that there will be sufficient ways to dispose of used vehicles in 3 or 4 years when large numbers of the contracts end.
Auto asset-backed securities are well established though. According to figures from Morgan Stanley, last year €4.8bn were purchased in the UK. This is the largest volume of this type of tradable asset since the financial crisis and a doubling of the amount sold in 2015.
In May of this year it was Volkswagen who launched a substantial Spanish auto securitisation deal, worth €1bn. The company’s Spanish subsidiary reported the lowest ever yield from auto securitisation trading.
BoE Watchful
Summing up its concerns about rising consumer credit, The Bank of England has indicated that it will be increasingly monitoring banks and other lenders (particularly on car purchases) to ensure relaxed lending policies are not based upon complacency and lack of foresight.
Sources: FT.com