Booming U.S. car sales and a push by private equity investors are creating a renaissance in the market for auto loan-backed securities. Corporations like Apple, Google and 3M as well as institutional and insurance-industry investors have been looking for the promise of steady yields in exchange for limited risk.
But a panoply of investigations into lending practices for so-called subprime, or riskier, borrowers, coupled with concerns about the exits of some auto-finance company investors, have some market observers warning that trouble could lie ahead.
"When you lower your credit standards, eventually the bonds will default and they'll fail," said Chris Hentemann, a veteran asset-backed securities investor who runs the hedge fund 400 Capital Credit Opportunities. "So that's why we've decided to step aside."
Hentemann, 46, should know: He once ran the global structured product desk at Bank of America, which included asset-backed securities like those based on mortgage and car loans, and was there during the early stages of the credit crisis.