Yield quest sparks drive to esoteric ABS assets
As yields have collapsed elsewhere under pressure from central bank interventions, fixed income investors have increasingly sought higher returns in the esoteric ABS sector, according to CSC and GlobalCapital’s annual securitization pulse survey.
In pushing to buffer the economy against the effects of the coronavirus pandemic, the US Federal Reserve expended significant ammunition from its 2008 crisis playbook. In a historic pivot, the central bank told market players that it would abandon its hard inflation target, adding that in addition to tolerating higher than 2% annual inflation, investors should expect rates to remain near zero through 2023.
Persistent low yields in the post-crisis era had already spurred investors into more far flung corners of fixed income markets, but a robust recovery that showed little signs of slowing before Covid hit was beginning to boost hopes for normalization. Following the announcement by the Fed that it would keep rates low for the next few years, ABS investors made a new push towards the esoteric ABS market, with survey participants most bullish about this sector.
A sector that has grown particularly popular in this period has been the whole business and franchise fee securitization market. The survey results showed that the asset class was a favorite among investors, who ranked whole business ABS as representing the greatest opportunity, above timeshare, device payment plan, solar finance receivables, municipal property assessed clean energy bonds, equipment and aircraft ABS.
Grouped together, respondents on the whole ranked PACE bonds as the greatest opportunity set in the sector, narrowly edging out whole business ABS.
In the era of a global pandemic, it is not surprising that survey participants ranked aircraft ABS as the highest risk among esoteric ABS asset classes. That market has seen intense volatility, and ratings actions have hurt the bonds in the secondary market.
From the onset of the pandemic to the end of 2020, just one aircraft deal was priced, a small ticket transaction collateralized by corporate and personal jets leased to companies and high net worth individuals. Sources say it will still be some time before the traditional aircraft securitization market takes off again, though with government pandemic aid to airlines drying up in the last quarter of the year, there is hope among market participants that ABS becomes an attractive source of funding for aircraft lessors again.
Most respondents to the survey (nearly 70%) across stakeholder types say that they expect issuance of esoteric ABS to be in the range of $25bn-$30bn for 2020 and $25bn - $30bn for 2021.
CSC supports issuers, investors, arrangers, originators, and advisors across all asset classes. Clients entrust us with their SPV management, independent director needs, trustee and agency commitments, accounting requirements and more across the United States, Europe, and Asia-Pacific. Commercial and agile in our thinking, our team brings innovative ideas to client interactions. With more than 120 years of independent ownership, we stand alone for long-term stability amidst a turbulent marketplace.