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First Boston to Issue $4 Billion in Bonds Backed by GMAC Loans

October 11, 1986

DETROIT (AP) _ First Boston Corp. next week will issue $4 billion in bonds backed by General Motors Acceptance Corp. car loans, the largest non-government bond offer in the United States, the investment firm said Friday.

The deal comes as the latest twist in the trend toward packaging assets as securities and selling them off to investors.

The ″securitization″ process, as its known in the trade, provides an alternative source of funds to a lender like GMAC. Auto loans are counted as assets on GMAC’s books because they represent money owed by car buyers.

The sale next week will reduce the interest rate risks associated with the extremely low rates General Motors offered as buyer incentives in September to clear out an 80-day inventory backlog, GMAC Chairman Robert Murphy said.

″We put those contracts on our books at 2.9 (percent annual interest rate), in the low point of the interest cycle,″ Murphy said. Some of the loans GMAC will be selling First Boston were made at 4.8 percent, still a below-market rate.

Rising interest rates over the next few years would make the cheap loans costly for GMAC, while the First Boston deal lets the finance company get the loans off its books now, Murphy said.

The asset-backed securities will be available with three different maturity dates and will be backed by a letter of credit from Credit Suisse and by a 5 percent GMAC guarantee on non-performing loans, said Anthony Dub, managing director in charge of First Boston’s Asset Finance Group.

Asset-backed Securities Corp., a 2-year-old wholly owned First Boston subsidiary, will issue $2.11 billion in bonds with one-year average maturity, $560 million with an average life of 2.2 years and $1.33 billion with an average life of three years, Dub said.

First Boston had announced Thursday it would issue $3.2 billion of the bonds, but the amount was increased Friday because of exceptional demand, Dub said.

″We’ve seen broad-based demand from institutions throughout the United States and significant interest overseas,″ he said.

The auto loan-backed bond issue, to be priced and offered next week, equals in size a governmental bond issue that First Boston’s London affiliate, First Boston Credit Suisse, handled last month for the United Kingdom. But it is the largest underwritten offering ever in the U.S. capital markets.

First Boston will buy the loans, with a face value of $4.25 billion, from GMAC and repackage them by putting them into its Asset-backed Securities Corp. and then issuing the three packages of debt.

″It is a novel application of a conventional mortgage structure,″ said Michael Youngblood, a Salomon Brothers vice president and manager of its residential mortgage securities group.

″What they’re doing is applying the (collateralized mortgage obligation) structure to the automobile receivables,″ Youngblood said.

Unlike collaterilized mortgage obligations such as Ginnie Mae government securities, the buyer of the First Boston asset-backed obligation will assume no prepayment risk, Dub said.

″In this case First Boston has assumed that risk, guaranteeing the buyer an absolutely certain amortization schedule,″ Dub said.

First Boston is able to assume the prepayment risk because people who finance car purchases are far less likely to refinance for early payment than are real estate purchasers, Youngblood said.

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