The securitization of automotive industry assets accelerates as Tesla issues $783 million ABS bonds

According to the financial news app Zhitong Finance, Tesla (TSLA.US) has sold over $783 million in bonds backed by car lease contracts from high-quality borrowers to investors, marking the company's second asset-backed securities transaction this year.

Tesla began the early marketing phase of the bond issuance last week, led by Société Générale from France. As of the end of trading on Wednesday, the highest-rated tranche of the securitization had a coupon rate of 4.827%.

In comparison, Hyundai's $1.72 billion top tranche of high-quality car loan asset-backed securities (ABS) had a coupon rate of 4.75% on Tuesday, while General Motors' (GM.US) $1.29 billion high-quality car loan transaction had a coupon rate of 4.74%. Tesla's highest coupon rate for the $750 million transaction in March this year was 5.53%.

ABS sales are the latest in a series of asset-backed transactions in the automotive industry as issuers rush to complete deals before the credit market is disrupted by the U.S. election. Automakers have raised $13.6 billion through securitization so far in October, hoping to sell loans or leases to institutional investors.

Tesla's bonds are being issued ahead of CEO Musk's long-awaited robotaxi announcement scheduled for Thursday, as the company grapples with slowing electric vehicle sales.

While Tesla's ABS issuances reached a record level of nearly $4 billion last year, the pace has slowed for 2024, with total transactions to date just surpassing $1.5 billion. Since launching its securitization program in 2018, the electric car company has entered the market at least 10 times, but not as frequently as many competitors. Ford and GM have each issued over $13 billion in asset-backed bonds this year.

Buyers of such debt face the risk of losses as the resale value of cars declines significantly. Lower vehicle residual values force lessors to charge customers higher fees, reducing the attractiveness of leasing.

Tesla's cars face their own unique challenges as the value of used electric cars is impacted by the decreasing prices of new electric cars. According to iSeeCars research, Tesla reduced the price of the Model 3 by 25%, the largest decrease among electric cars so far this year. The proportion of Tesla sales from leases has also been declining, a trend analysts attribute to soft resale prices.

Fitch Ratings stated in a presale report: "Tesla's price reductions, primarily affecting the Model S and X, combined with the softness in electric vehicle values, could result in lower RV realizations." Fitch Ratings assigned the highest tranche a rating of F1+sf, indicating a high likelihood of repayment. "Structural protections and Fitch's conservative loss assumptions mitigate the extent of the impact."

Trading documents show that Tesla's latest transactions come from its active leasing platform, consisting of over 26,000 leasing contracts, with borrowers having a FICO weighted average credit score of 764.

The issuance volume in the ABS market is soaring. So far, in 2024, there have been over $292 billion in transactions entering the market, surpassing last year's total. Based on historical data, the next milestone is $313 billion in 2021