LOS ANGELES - Mitsubishi Motor Credit of America has tightened its consumer lending policies, but Wall Street continues to treat Mitsubishi's asset-backed securities offerings with suspicion. Last week, ratings agencies downgraded the entire $4.7 billion portfolio of asset-backed bonds issued in 2001 and 2002.
Asset-backed securities are different from standard corporate bonds, which are rated based on the underlying strength of a company. Asset-backed securities are based on the strength of the underlying loan portfolio, meaning the consumers who will be financing the cars, as well as the cars' residual value. As a result, even though Mitsubishi's corporate bond rating is "junk," it still can get AAA-ratings on its asset-backed loans - for a price.
But to ensure an AAA-rating on an asset-backed offering, an automaker pays institutional investors "credit enhancements" to cover projected losses in the pool of loans. In the case of Toyota and Honda, that amount is typically about 12 percent of the total offering.
But in Mitsubishi's case, that number has soared from 20 percent to as high as 27 percent in the past year, which means the usable capital from an offering is that much less, raising the cost of money.
"It's a function of the credit quality of the underlying pool," says Mike Binz, an analyst in the amortizing department of ratings agency Standard & Poor's in New York. "Ultimately, it costs Mitsubishi more to get money."
And despite those additional credit enhancements, Standard & Poor's and Moody's put Mitsubishi's portfolio on "credit watch" and downgraded the loans.
"That means that the portfolio's performance has deteriorated," Binz says. "It doesn't mean they've gone through all the credit enhancement, but we're asking if it is still enough to cover the remaining losses."