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Yield quest brings ABS out of Great Recession’s shadow

In the depths of the financial crisis, the question of securitization’s comeback was not a matter of when, but if. Though the roots of the crisis could be traced back to the residential mortgage market, securitization was branded public enemy number one and took more than its fair share of blame. But nearly a decade later, ABS is booming, fuelled by investors’ hunt for yield in a low interest rate world. By Max Adams.

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Total securitization issuance across asset classes hit a record high of $893bn in 2006, from a humble annual volume of $10bn in the early days of the market 20 years ago.

Just two years later in 2008, the market had dried up almost completely.

In August and October of that year, auto and credit card ABS issuance clocked in at zero, while CMBS would vanish completely until 2010 and the residential MBS market appeared to be dead for good.

Fast forward eight years. Issuance of non-mortgage ABS climbed to $283bn for the full year 2016, according to figures from the Securities Industry and Financial Markets Association (Sifma). What the market calls “plain vanilla” assets, such as credit cards and auto loans, have led securitization’s resurgence since the crash, but those sectors do not tell the whole story.

Greater volumes

Asset classes such as equipment loans and leases and whole business ABS are also being issued in greater volumes, while US chains and franchises are offering up whole business deals to investors hungry for returns beyond what can be achieved in mainstream fixed income sectors.

According to Wells Fargo research, ABS issuance touched nearly $88bn year to date on May 22.

That total accounts for all non-mortgage related asset classes. Year to date auto ABS issuance is at $33.8bn for the same period, just $2bn shy of the entire 2008 total. Similarly, credit card ABS stands at $23.8bn, $1bn less than all of 2008.

Nevertheless, it has taken some time to get to this point, and like Europe, US securitization carried the stigma of the crisis for many years after the recession officially ended.

However, unlike Europe, the US market has climbed back to the peak and then some, shaking off nearly all of the negative connotations of the events of 2008. 

QE or bust

Investors and analysts speaking with GlobalCapital say that the primary driver of the securitization market’s comeback — as well as its prospects for growth — have been low interest rates, which have drawn investors far and wide looking for higher yields. 

At first glance, the idea that investors are being driven down the curves to meet return targets seems obvious in the face of historically low interest rates. Indeed, plain vanilla ABS is thriving, as figures for credit card and auto ABS issuance show.

What has surprised some observers though, is the willingness of investors to dive into much more esoteric assets, such as aircraft, equipment and whole business ABS. 

The market for these bonds is thriving and first time issuers are finding it easier to come to the market with new offerings, as they are able to take advantage of investor appetite to lock in cheap and stable funding.

New faces

This year alone has seen its share of new faces, with the likes of TGIF Funding, Focus Brands, Coinstar, Five Guys and Church’s Chicken all tapping the capital markets for financing. 

Even more “off the run” asset classes are coming to market more frequently. In May, Seacube Container Leasing priced an offering that stirred the sleepy market for container ABS. 

The issuer priced its senior notes not at double digit or even high single digit yields that could once be expected for such unique collateral, but at 3.65%.

Observers said that this was a demonstration of more investors buying into the ABS broadly, and esoteric ABS in particular.

And it is not just small accounts, or fast money buyers who are getting in on the action.

At a roundtable discussion held at the end of 2016, some of the biggest fixed income portfolio managers including AIG, Loomis Sayles and MetLife said that they would be looking further afield in the coming year for ABS assets which offered a bigger uptick in yield. 

Speaking with GlobalCapital as they head into the second half of 2017, many of those same investors have been true to their word, saying that aircraft, equipment and the blossoming market for wireless handset receivables are firmly in their sights.

RMBS begins to stir

Finally, there is the market for residential mortgage backed securities.

Not long ago considered to be dead in the water, RMBS has made a slow, albeit sometimes painful, comeback from the brink. Though many observers think that it may still never return to its pre-crisis size (and rightly so, according to some), RMBS is witnessing levels of interest that it has not experienced since 2008.

Part of this has been thanks to the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have been mandated to offload more risk to the private market as part of the terms of their conservatorship, which they have been in since 2008. Their credit risk transfer (CRT) bonds have taken the place of private label RMBS in many ways. 

These programmes have grown steadily since inception in 2013, and more issuance and new structures have served to build the investor base in the US, while both GSEs are said to be getting ready to pitch more European investors on the deals. 

But the other side of the equation has been the developing comeback of true, private label issuance, especially on the subprime side.

Issuers and investors say that 2017 is set to bring more rated, subprime issuance than in any year since the crisis, and investors are ready to pounce on the opportunity.

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Rating agencies in demand

The rating agencies this year have said they are fielding more calls than any year post-crisis about rating new deals, and some see this market as a key to expanding credit availability for more US homeowners, rather than as the house of cards it was revealed to be once the market crashed. 

Overall, the expansion of the base of investors all scrounging for yield has driven the comeback of securitization in a way many thought was not possible after the crisis.

Certain consumer assets would always find funding from the ABS markets, but what has surprised many market watchers has been the growth of the esoteric ABS and private label ABS markets. 

Long term sectors

With the US Federal Reserve expected to increase interest rates gradually, rather than rapidly or abruptly, issuers say they are confident that investors will still be drawn to the market, even as other sectors, like high yield bonds, could rise again. 

As issuance builds and liquidity grows, issuers and analysts say that it is likely that investors stick around, making these sectors into long term staples of fixed income, rather than a momentary blip in a low interest rate world that they were once thought to be.

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