Market on the move: taking the pulse of the global securitization industry
The securitization market has come a long way since the financial crisis. In a low interest rate world, capital markets have been an attractive source of funds for companies, who can cut their cost of funds compared to issuing corporate debt while still offering yield hungry bond buyers relatively high returns.
In the US, the securitization market has lured a range of new and returning issuers, selling bonds backed by such a diverse array of assets as timeshares, cell phone towers, royalty streams, franchise fees and solar panels. But the boom in esoteric ABS issuance has not come at the expense of other, more time tested sectors. CLOs clocked an all-time record for issuance volume in 2018, with 2019 on track for another strong showing. CMBS, while shifted somewhat in terms of how issuers are using that market, is still a reliable source of debt capital for real estate owners, especially in the form of commercial real estate CLOs, issuance of which has doubled in size over just a few years. Meanwhile, in the residential mortgage bond market, private label issuers are closely following developments with the government sponsored enterprises, which are finally on track to be released from government ownership after over a decade.
In Europe, market participants are optimistic, but also somewhat fatigued by years of post-crisis regulatory wrangling. The new Securitization Regulation, specifically the ‘simple, transparent and standardized’ (STS) framework, has given investors and issuers much to think about. In the year since the regulation was implemented on January 1, 2019, there are still lingering concerns as to whether or not the rule in the shot in the arm that will reinvigorate the European structured finance market. That said, the market in Europe is humming along at a good pace. Consumer ABS, CLOs and RMBS sectors are on sound footing, and helpful moves from EU and local regulatory bodies are accelerating the disposal of non-performing loans held by European banks, much of which ends up in securitization format from private equity issuers.
To get a deeper understanding of these markets, CSC partnered with GlobalCapital to survey market participants across geographies. Over the course of two months, the publication surveyed investors, issuers, bankers and service providers to gauge their views on the state of securitization. Overall, more than 150 individuals across 21 countries were surveyed.
The results paint a picture of a market that is moving ahead at a brisk pace, with sufficient investor demand to meet the funding needs of issuers in both the US and Europe. Years of sustained low interest rates globally have boosted demand for bonds across securitized assets, and investors are piling into deals, and it is not uncommon for new deals to be heavily oversubscribed.
Yet, beneath the optimism expressed by market players in the survey, caution was definitely evident. As the US economy blew past the record for longest period of expansion in July, questions grew over how long the current cycle has to run before a downturn. In Europe, the concerns are similar, though participants there are more concerned about low or stagnant growth becoming the norm.
As the credit cycle ages, investors in the US and Europe active in securitization say that they are skewing to the defensive, moving up in credit or sticking more with experienced issuer names. While there are differences in opinion on when the next downturn may come, the market seems fairly united in the view that it is late innings for the cycle.
CSC and Globalcapital hope that this survey delivers insight and expands the view of these markets for readers at a time of immense change and expansion for the securitization industry globally.