Cash Management

Asset-Backed Bonds Are Back

Flight to quality spurs rise in securitized instruments.
Joseph McCaffertySeptember 7, 2001

As the brisk demand for convertible debt subsides, companies are turning to another variation on the bond theme for their capital needs — asset-backed bonds. The bonds, backed by income-producing assets such as car and credit card loans, have been cheaper than issuing corporate bonds in some industrial sectors.

A flight to quality has created a strong demand for asset-backed bonds among investors who are looking for safer alternatives to volatile stock and corporate bonds. And, thanks to seven interest-rate cuts by the Federal Reserve this year, short-term interest rates have lured companies like financial services firm Marshall & Ilsley Corp. and retailer Target Corp. to issue asset-backed securities.

In fact, the largest ever asset-backed bond sale, a $602 million cash-flow collateralized debt obligation (CDO), was priced August 15. The deal, issued by asset manager Pacific Investment Management Co., is being offered through Credit Suisse First Boston and is expected to close September 18.

Nearly $170 billion worth of new asset-backed securities have been issued so far this year, nearly 30 percent more than for the same period last year. Asset-backed bonds, compared with unsecured corporate debt, could reduce borrowing costs between a half and a full point. That’s an improvement compared with a saving of only a quarter point earlier this year.