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Tuesday, August 7, 2012

Google Googles for Yield, Finds Auto Bonds

Story first reported from WSJ.com

Feeling lucky, Google Inc.  has found a new place to park some of its $40 billion cash hoard: bonds backed by car loans.

The Mountain View, Calif., company has plowed hundreds of millions of dollars in recent months into asset-backed securities, tied largely to automobile loans and consumer credit-card payments. Among Google's recent purchases: triple-A-rated debt from car makers Honda Motor Co.  and Hyundai Corp.  Google had previously restricted itself to U.S. Treasurys, high-quality corporate bonds and other low-risk securities.

Google's foray into auto lending is the latest sign that ultralow rates on the longtime standby of corporate treasurers, highly liquid Treasury securities, are pushing cash-rich U.S. companies to find new places to put their money. That shift has been a boon for bond issuers, even if buyers are only trying to squeeze a bit more juice out of their portfolios.

"We are not trying to hit a home run here," said Google's treasurer, Brent Callinicos.

The shift has benefited issuers of bonds backed by credit cards and auto loans. Through Aug. 2, $60.68 billion of bonds tied to car loans had been sold in the U.S., according to Thomson Reuters. That is up 50% from a year earlier and the highest figure at this point of the year since 2005.

Market participants say the ABS offerings have grown to meet demand, enabling companies to borrow in larger chunks—in some cases at rates unseen since before the crisis. Late last month, a unit of Nissan Motor Co. priced $1.4 billion of bonds—increased from a planned $1 billion—at an average rate of 0.48%, a record low.

Google, the fourth-most cash-rich company in the S&P 100 after General Electric Co., Goldman Sachs Group Inc. and Microsoft Corp., according to FactSet, isn't alone in piling into these offerings. The search firm joins diversified manufacturer 3M Co.  and payroll-services company Automatic Data Processing Inc., which also have purchased asset-backed securities this year, the companies said.

About 80 firms, including asset managers and a handful of corporations, look into buying bonds in the typical auto ABS deal, said Brian Wiele, head of the Americas securitization syndicate at Barclays. That is double the typical figure of a year ago, he said, and deals are being sold in about a day and a half—roughly half of the average time last year.

"We have seen very good participation from corporates," said Amanda Magliaro, head of the asset-backed syndicate at Citigroup, which led the Nissan offering. "Investors have confirmed their own belief that the asset-backed market is safe and very liquid."

The auto portion of an ABS index compiled by Barclays has returned 2.34% this year on deals with an average maturity of just over two years. That compares with 0.30% for comparable Treasurys this year.

Some recent asset-backed securities have been priced to yield as little as 0.5%, but even that is enough of a premium to two-year Treasurys yielding 0.2% for company treasurers as they weigh acquisitions and other longer-term options for deploying cash.

"Auto and credit-card ABS performed well during the crisis," said Scott Krohn, vice president and treasurer in the financing arm of 3M, based in St. Paul, Minn.

So far, asset-backed securities represent less than 1% of Google's cash.

The company says it buys short-term, high-quality debt and participates in deals that are usually overcollateralized. That means for every $100 of loans in the pool there may be only $85 of bonds, for example—lowering the risk that purchasers of the debt will have their payments squeezed by defaults.

An ADP spokesman said the company's ABS holdings account for a number in the low-single-digit percentage of its investment portfolio.

John Bella, managing director in ABS at Fitch Ratings, said net losses on auto asset-backed securities have fallen steadily since the crisis four years ago, and the deals are now backed by stronger collateral, or loans made to so-called prime borrowers.

Their high credit scores and the strength of the loans' performance during the most recent downturn may have helped investors gain more confidence in the debt as an alternative haven.

Only about 1% of the loans originated in 2011 and packaged into auto asset-backed securities are expected by Fitch to default, compared with 2.6% of the loans in auto deals originated in 2007, Mr. Bella said.

Still, there are risks to the bonds in an economic slowdown, should consumers fall behind on their loan repayments.

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