With the chaos unfolding in Westminster, you may be forgiven for thinking from the title that your correspondent is about to pack in his structured finance journalism career and throw his hat into the ring to be the UK’s next prime minister.
Alas, the Springsteen reference is a homage to the US ABS market, which has, well, kept running throughout what has been a horrible year. And it is about to kick off once again.
The Boss wanted his hit song “to grab you by your throat and insist that you take that ride, insist that you pay attention”. A flurry of SEC filings in the past week has had a similar effect on securitization bankers, who are looking to jump through a tight window of opportunity before SF Vegas.
“The market is pricing in a high probability of a 75bp hike [on July 27 by the Federal Reserve],” a banker told GlobalCapital. “People will want to be out of the market before that.”
Still, issuers will have to tread carefully. The market is becoming accustomed to higher levels of volatility, but planning your moment is a lot tougher than it once was, a banker in New York toldGlobalCapital.
“A year ago, I wouldn’t have cared at all about a Fed meeting,” he said. “Now they’re creating a lot of choppiness and sometimes […] suddenly you spent every day trying to figure out whether it’s going to be a 75bp hike.”
US CLOs haven’t had a great time recently. Spreads have ballooned nearly 100bp on triple-As this year and primary issuance is way down. Last year saw around $400bn of issuance, this year we enter the second half still $12bn short of the $100bn mark.
However, unlike in Europe (more on that later), the US market continues to function despite the “sombre” mood.
A CLO investor in New York toldGlobalCapitalthat wider spreads have encouraged pension funds to fill the hole left by traditional CLO investors as the asset class offers a good mix of liquidity, security and returns.
“They’re looking at it now and saying: ‘[Here I can] buy something which is pretty liquid, floating rate in case interest rates go through the roof, and the yield is somewhere in the order of 5%’. It looks really compelling,” he said.
Also in the US, rate reduction bond (RRB) securitizations are booming. Typically, this esoteric asset class has one or two deals per year, but 2021 and 2022 have had 12 between them, with more on the way.
I’m not quite sure whether this is good or bad news. The securities are usually issued by US utility companies to finance infrastructure repair works that suddenly arise. Their cash flow comes from small, extra payments that some state legislators have permitted utility firms to add to consumers’ bills.
So far so good. The only issue is those sudden costs generally come from climate-related catastrophes. Think wildfires, the big freeze in Texas last year, hurricanes etc.
“They’ve become increasingly more popular because there’s been increasingly more events that have necessitated them,” Philip Armstrong, senior portfolio manager at Invesco, told GlobalCapital.
Still, they have been helpful in getting utility firms out of big financial problems. PG&E entered Chapter 11 bankruptcy protection and RRB securitizations were crucial in getting them out.
“They couldn’t have everything unsecured,” said the banker. “By having this secured in a programme that was around $9bn, they maintained their investment grade ratings as they exited bankruptcy.”
The sound of silence
Over in Europe, the mood music is less Springsteen and more Simon and Garfunkel.
No public deals this week. Not even the squeak of a mandate. Simon and Garfunkel may be too generous, perhaps the mood music should be John Cage’s4'33".
There were some stories, however. Olly West reported on the PCL Funding insurance premia ABS priced last week. The transaction was “not significant enough” to warrant additional activity elsewhere in the market, argued Cas Bonsema, ABS analyst at Rabobank.
Elsewhere, rating agency S&P told GlobalCapital that as the cost-of-living crisis in the UK and Europe continues to bite consumers, the key metric for RMBS and covered bonds would be unemployment.
So long as that stays strong, products are unlikely to be downgraded, Andrew South, head of structured finance research for the EMEA region at S&P said.
“We wouldn’t expect a short-term increase in inflation to have a profound enough effect to cause a problem to a triple-A tranche,” he said. “What would be a bigger concern is if there was a full-blown recession and a rise in unemployment, in which case you’ve got borrowers who can’t make any payment on their mortgage.”
The last few Recaps have ended on sour notes, and I can’t promise a change this week. European CLO issuance is set to halve this year. Last week saw Sound Point Capital price its ninth CLO and the first in the market for a month, but that hasn’t exactly lifted the mood, Bill Thornhill reported.
“It’s no secret the market is tough and getting deals across the line is proving a bit of a battle, but hopefully there’ll be others,” said one PM.
Have a lovely weekend. I’m in the first leg of a golfing quarter-final on Sunday. If I lose, I won’t mention it. If I win, expect some Tiger Woods references next week.
Tom