ABS issuers should be programmatic where possible
Investors are favoring familiar names and structures in times of uncertainty
With markets stuck in a seemingly endless cycle of volatility and unpleasant surprises, ABS issuers have a lot to gain by being programmatic with their funding plans. Doing so would allow them to strengthen investor relationships and achieve better pricing.
If capital markets participants have learned one thing in the last year, it is that the best windows of opportunity for issuers don’t tend to last long. Yet while broader market volatility is hard to predict, issuers can do certain things to create better conditions for themselves: one is to be disciplined in approaching the market regularly.
The fourth quarter of 2022 was a tough time for borrowers looking to raise capital as investors sat back and licked their wounds after a torrid year. Several deals were pulled or postponed. But even then, programmatic issuers — such as solar issuer Goodleap, which came to market every quarter — had an easier time pricing deals.
In the first quarter of this 2023, the issuance window burst open with increased demand and tightening spreads. But when the collapse of Silicon Valley Bank led to volatility in markets and concerns over the banking sector, there was a sudden downturn in market tone.
This caused another wave of deals to be pulled back or postponed in March, despite demand exceeding supply in January and February. It was Dell and Hewlett Packard, well-known companies and regular equipment ABS issuers, that were able to reopen the primary market.
In challenging times, being programmatic helps issuers stay on the investors’ radar. And amid the turbulence, investors are swaying to more familiar names and structures during times of volatility.
The ABS market is already struggling with concerns over the health of the US consumer, a looming and seemingly inevitable recession, and now has to deal with increased risk in the banking sector. It is therefore natural that investors are skeptical about venturing out towards new or less experienced issuers during these times.
Many do not want to take on that extra risk unless it pays off significantly, making it more difficult and expensive for non-programmatic issuers to execute deals.
While there is nothing issuers can do to prevent external headwinds afflicting the market, they can approach funding in a way that gives them a better chance of success. Many issuers tapping into the ABS market need for funding; they do not have the luxury of waiting for the perfect time to come to market like big corporates.
Being predictable and frequent — rather than waiting for an idyllic day that might never arrive — is the better strategy for issuers, even if they have relatively low amounts of capital to raise.
Such a strategy can also help reduce the asset liability mismatch for issuers in a rising rate environment. For example, the issuers that waited to securitize their 2021 vintages as markets started to turn sour in early 2022 were ultimately forced to pay even heftier spreads and yields in the second half of 2022 as conditions only got worse — and for collateral originated in a lower rate environment.
Less frequent issuers also have several additional drawbacks that can put investors off: a lack of track record, less experience with ratings agencies, and often diminished secondary trading in their curves. Particularly for those companies looking to securitize non-traditional assets, it is harder to convince investors of the value they bring to the table.
Sure, some weeks are definitely better than others to price deals. But as a general principle issuers need to approach the ABS market in a disciplined and predictable manner: this enables them to build stronger relationships with investors and achieve credibility and trust that gives the buy-side faith in their ability to navigate volatility.
Securitization is a key part of the funding strategy for some companies and most can’t afford to wait several months in hopes of finding the right time to come to market. Instead of hanging around waiting for the perfect day, issuers should commit to a regular issuing schedule that allows them the best chance of avoiding further disruption to their funding plans.