Credit Unions Are Packaging More Auto Loans Into Bonds as Rates Rise

Four years ago, a credit union sold a bond backed by auto loans for the first time. This year, more and more auto loans held by the non-profits are being packaged and sold into asset-backed markets, as elevated interest rates put pressure on credit unions’ balance sheets.

(Bloomberg) — Four years ago, a credit union sold a bond backed by auto loans for the first time. This year, more and more auto loans held by the non-profits are being packaged and sold into asset-backed markets, as elevated interest rates put pressure on credit unions’ balance sheets.

Of the 10 bonds backed by auto loans ever issued by credit unions in the US, six have occurred this year, according to data compiled by Bloomberg News. That tally includes a $306 million offering by California-based credit union Valley Strong, which finalized pricing on its first such offering outside private markets on Thursday.

Pooling their loans and selling them to investors in the form of asset-backed securities — a technique known as securitization — is one way that credit unions are responding to balance sheet stresses posed by higher interest rates. Rising rates push down the value of long-term assets while increasing the cost of holding customer deposits, fueling a liquidity crunch that’s made it more attractive to exchange liquid assets for up-front cash.

“As deposit costs rise and credit union assets grow, securitization offers an attractive way for credit unions to manage their balance sheets,” said Eugene Belostotsky, an analyst at Citibank NA.

Credit unions have raised a total of more than $2.8 billion by issuing auto ABS in public markets, including $1.6 billion just in the last six months, according to Bloomberg News’ data. Belostotsky expects more issuance.

Like banks, credit unions take in deposits from customers and invest that money elsewhere. Unlike banks, though, credit unions’ profits are returned to members in the form of reduced fees, higher savings rates and lower loan rates.

Every credit union has different membership criteria that tend to focus on a specific population. For example, current or former members of the military can join Navy Federal Credit Union, the nation’s largest.

It only became feasible for credit unions to issue auto ABS in 2017, when new rules were adopted by the National Credit Union Administration. The rules created a safe harbor that insulates securitization trusts’ collateral from seizure in the event of credit unions declaring bankruptcy, according to a September research note by Citi’s Belostotsky.

Credit unions have no shortage of auto loans to securitize. The non-profit entities were responsible for more than one-fifth of total auto financing in the US in the second quarter of 2023, behind only banks and captive finance companies run by large auto manufacturers, according to report by Experian. And their market share has been growing, the report said.