SAN Banco Santander SA

By Gunjan Banerji and Julia-Ambra Verlaine 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 28, 2020).

Investors are snapping up complex securities linked to some of the markets deemed most vulnerable to the coronavirus-driven economic slump, a sign that the yearslong reach for yield has survived the market shock.

Faced with withering share prices and falling yields on safe government bonds, portfolio managers are seeking out returns in an array of strategies that in some instances take them into esoteric corners of the financial markets. One popular spot is the market for asset-backed securities, typically bonds whose payments to investors are generated by the cash flows collected from a large pool of car loans, property leases or other agreements.

Despite worries about a recession ahead and falling consumer spending, demand for bonds backed by U.S. auto loans has outstripped supply in recent days, bankers and investors said. A $1 billion bond marketed this month by Santander Consumer USA was sold at yields lower than initially expected, people familiar with the deal said.

In another closely watched deal, Dell Technologies Inc. last week sold approximately $1.1 billion in debt backed by leases on equipment to big and small companies across the country, including computers and servers. Meanwhile, sales of so-called structured products geared toward individual investors -- including bets on stocks repackaged into bonds -- hit a decade high in March.

The data show that individual and institutional investors alike remain willing to put money to work, even as uncertainty around the economic impact of the coronavirus pandemic lingers. Many analysts and traders said they have been struck by the extent to which some of these markets appear on the road to recovering their full health, just weeks after trading was frozen with the news that many jurisdictions across the U.S. had imposed stay-at-home orders and similar measures.

"I'm so shocked that we're here so fast," said Paul Norris, head of structured products at Conning, who oversees $20 billion in securitized debt. He attributed the rapid bounceback to the Federal Reserve's expansive support for markets, saying he bought asset-backed securities recently because the Fed-inspired rally "created an opportunity for a lot of investors."

This week investors will get fresh reads on consumer spending and confidence as well as gross domestic product for the first quarter. A measure of consumer sentiment for April had its sharpest single-month decline on record, the University of Michigan reported Friday.

The current market environment is confounding for many investors, with share prices rebounding smartly in the U.S. even as bond yields remain near record lows and oil prices this month briefly fell below zero. Accordingly, investments that promise higher and steadier returns remain popular.

"That's a constant question from not just individual clients but institutional clients: Where do we go for yield?" said Mark Grant, chief global strategist of fixed income at B. Riley FBR Inc. "People want yield, they want income, they want money coming in."

Issuance year to date in asset-backed securities stands at $55 billion, according to JPMorgan Chase & Co. research analysts. That is down from $77 billion over the same period last year, but the pipeline for more deals is filling up.

The market for asset-backed securities was shut down for nearly four weeks, beginning in mid-March. That was a shorter period compared with the depths of the financial crisis, when investors stopped buying securitizations for months until the Fed's Term Asset-Backed Securities Loan Facility, or TALF, was up and running.

"Sentiment is certainly better than in 2008," said Marty Attea, head of securitized products origination at Barclays. "During the financial crisis, securitization was the epicenter of the earthquake, and it rippled through the financial machinery. This time asset-backed securities are along for the ride with the rest of the market -- they are a casualty, not a cause."

About $8 billion of subprime auto debt has been issued so far this year, according to JPMorgan, compared with $10.1 billion during the same period last year. A total of about $30 billion was issued in 2019, near a decade high.

When Santander and GM Financial issued bonds backed by auto loans this month, demand for the debt outstripped supply, according to bankers at Barclays who led the deals. They were the first to hit since the pandemic rattled some of the safest corners of debt markets, including Treasurys and high-grade corporate bonds.

The nation's largest used-car retailer, CarMax Inc., successfully priced bonds a week later.

Enrique Mayor-Mora, chief financial officer of CarMax, said the company was "pleased with investor demand," which allowed it to sell more debt than it had originally planned.

The heavy interest comes even though the market has grown riskier in light of the coronavirus pandemic. Subprime auto debt including some of Santander's is backed by some of the riskiest borrowers with typically lower credit scores.

Santander recently disclosed that there was a sharp uptick in the number of people seeking payment extensions on their auto loans. About 7.5% of the loans backing its debt had received a payment extension in March, up from roughly 1% in February, according to JPMorgan. Fitch Ratings recently said that its outlook on the auto-loan sector has worsened in light of the coronavirus pandemic.

Investors have also piled into exchange-traded products offering steady income and dividends, FactSet data show, ranging from funds promising consistent stock returns to risky exchange-traded notes offering payouts tied to commodities.

Issuance of structured products geared toward individual investors hit a decade high in March, the most volatile month in the stock market's history, according to industry publication Prospect News. These types of products are built by banks using derivatives and often end up in the hands of individual investors who receive a future payout based on the performance of such assets as stocks or commodities.

In a corner of this market, so-called auto-callable notes have been popular this year, with issuance topping $13 billion, according to data from mtn-i. A rise in share prices can trigger redemption of the notes.

In the past, some of the auto-callable notes tied to big technology companies have fallen short in delivering the high returns investors expect.

Still, bankers said the recent market environment -- marked by big swings up and down across markets -- tends to draw people to the products.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Julia-Ambra Verlaine at Julia.Verlaine@wsj.com

(END) Dow Jones Newswires

April 28, 2020 02:47 ET (06:47 GMT)

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