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Asset-Backed Supply Expected To Fall

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Supply in the asset-backed market is expected to drop this year, marking the first time in the securitization market's relatively short history that growth has stalled.

David Heike
Gyan Sinha

Supply in the asset-backed market is expected to drop this year, marking the first time in the securitization market's relatively short history that growth has stalled. Sell-side analysts and bankers predict new issue volume will decline up to 20% versus last year's total of roughly $500 billion in public U.S. sales. A slowdown in refinancings and expectations the Federal Reserve will raise interest rates at its May meeting will combine to crimp growth in the home equity sector this year, they say. And, that is significant for the broader securitization market, since home equities constituted half the market last year and fueled its overall 14% growth against 2002's total. "I think we've seen the high-water mark," says Gyan Sinha, senior managing director and head of ABS research at Bear Stearns. He expects prepayment speeds to slow by a third, leading to a drop in securitizations. Furthermore, the expansion of the ABS framework to new assets, which was a hallmark of previous economic upswings, probably will not continue in 2004. "The last recession was not favorable to some of the esoteric asset classes; people are more careful and that puts a brake on things," he adds.

David Heike, head of ABS strategy at Lehman Brothers, expects supply will drop by up to 10%. He agrees that home equity issuance will be down and says there is limited room to extend ABS structures to new assets, which in the past have contributed to year-over-year growth. "The velocity of new sectors will be slower," he says. Also, the corporate market may entice issuers to sell unsecured bonds, which could be cheaper for sub-prime ABS issuers if corporate investors bid up bond prices in a search for yield. "The corporate market is more receptive than it has been in years; I don't think [issuers] will be as dependent on securitization," he reasons.

Other factors, such as a credit blowup or another kind of exogenous shock, may offset the positive technicals. In any event, lower supply is likely to be concentrated in a handful of sectors. Fluctuations in supply are likely to become the norm for the asset-backed market, as opposed to a steady ascent. Sinha says: "It's a mature market now, from now on it's going to be cyclical with interest rates."

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