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Recovery ABS issuance is nearing its ceiling

Hurricane Evacuation Route sign in blue

Sector has limited growth prospects, similar to insurance ABS

Despite the explosive growth of utility ABS last year, the sector has limited growth prospects, similarly to insurance ABS, because it only takes place in response to rare events and will never build a dedicated audience among investors.

Utility securitizations have been around in the US for decades. Specially sanctioned by individual states, such transactions have been used to allow utility companies to finance repairs needed after natural disasters and, more recently, the green energy transition and even Covid-19.

After a long hiatus, the sector experienced a resurgence last year, with issuance totalling approximately $2.98bn. That compares to zero issuance in 2020. The sudden upswing was made possible in part by new securitization statutes that were passed in states such as Colorado, Montana and New Mexico.

California's Southern California Edison issued its first securitization in more than 20 years last February. The $338m transaction raised funds that will be spent on repairs and measures to prevent future wildfires.

The unexpected return, along with the increasing rate of natural disasters in the US, has caused some market participants to highlight utility ABS as a huge growth sector.

“Stranded assets or rate recovery ABS could ramp up as active storm seasons in recent years may fuel greater funding need for utilities,” said JP Morgan analysts in a 2022 outlook report.

Utility ABS certainly serves a purpose, and one that will be important as natural disasters occur at a higher frequency. Its advocates say that it saves utility customers, or ratepayers, money over the long run.

But in the grand scheme of things, there are limited growth prospects to this asset class, which has a lot in common with insurance backed ABS, another product that attracted a lot of attention when it first appeared. Insurance ABS ended up occupying a small corner within securitization.

“It’s not something that investors and issuers are putting their heads together and saying, ‘OK how do we form a business here,’” said Peter Van Gelderen, vice president and senior portfolio manager at American Century Investments. “It’s just response to an event.”