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 pandemic’s effects, the U.S. 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 sign of slowing before Covid-19 hit was beginning to boost hopes for normalization. Following the Fed’s announcement that it would keep rates low for the next few years, ABS investors made a new push toward the esoteric ABS market, with survey participants most bullish about this sector.
A market that has grown particularly popular in this period has been in whole business and franchise-fee securitization. The survey results showed that the asset class was a favorite among investors, who ranked whole business ABS as representing one of the greatest opportunities—above timeshare, device payment plan, solar finance receivables, and equipment and aircraft ABS–along with municipal property assessed clean energy (PACE) bonds.
In the era of a global pandemic, it’s 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. However, 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 survey respondents (nearly 70%) across stakeholder types said that they expect issuance of esoteric ABS to be in the range of $25 billion-$30 billion for 2020 and 2021.
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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.