US Consumer ABS Market Balances Recession Fears with Reach for Yield
The US consumer ABS market is in the middle of a balancing act, as investors cautiously look at indicators of further economic pain while also eyeing riskier assets in the hunt for yield, according to CSC and GlobalCapital’s annual securitization pulse survey.
Survey respondents paint a picture of a market caught between two distinct impulses.
On one hand, respondents agree that there is an economic downside ahead, at least in the near term. Since the pandemic began early last year, this has driven a flight to quality among ABS investors, pushing spreads tighter on things like prime auto ABS and credit card bonds. The short-dated nature and prime quality of the borrowers have been an attractive buy in times of intense uncertainty.
On the other hand, however, market players acknowledge that rates will stay low for quite some time longer than many expected at the outset of 2020, before coronavirus hobbled what had been a booming economy. As the U.S. Federal Reserve burns through its crisis-era playbook, it has signaled its intent to keep rates near zero through at least 2023.
Reflecting this demand for higher-yielding assets, survey respondents ranked subprime auto ABS as representing the best opportunity among other consumer ABS asset classes, ahead of credit card, prime auto, and marketplace consumer ABS.
Conversely, survey respondents ranked marketplace loans as the riskiest asset class, a common theme throughout the pandemic. According to sources speaking with GlobalCapital, marketplace loans become increasingly risky during stressful economic times. They tend to be lower in priority for borrowers than mortgages, car payments, or even cell phone bills. Certain marketplace loan deals have already breached triggers and have had to accelerate payments to noteholders to dodge losses on the senior bonds.
For the subprime auto sector, survey data shows that more than 60% of respondents saw the best value in the mezzanine tranches of the capital stack. Compare that to marketplace loans, where 100% of investors specifically said they are staying up in the most senior parts of the capital stack.
There was a dispersion of views on the direction of spreads. Speaking with sources in the market, the wide range of opinions on whether spreads in these asset classes will tighten, widen, or remain flat over the next 12 months is a function of:
· Uncertainty related to the potential path of regulation and legislation;
· Lack of clarity on the COVID-19 crisis; and
· Length and depth of the economic downturn.
The outcome of the US election—coming after the survey was conducted—may have added to investor concerns. A Democrat-controlled US Senate means a revamp of consumer protection rules could be in the cards, potentially slowing originations and restricting borrower refinancing opportunities.
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About the survey:
The data is based on a market study conducted by GlobalCapital during August and September 2020. A total of 180 responses were collected across 31 countries in Europe and North America, spanning mid- and senior-level executive positions and four core stakeholder types: issuer-sponsor, service providers, investors, underwriters-arrangers-bookrunners-structurers, and other.
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