Bring on the US ABS innovations
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Bring on the US ABS innovations

Seven cars hang from giant clothes pegs on a wire in Brighton as part of the annual Art Festival Fringe street theatre.

US market conditions are perfect for bringing more weird and wacky ABS deals

Esoteric ABS has always been a fertile ground for innovation, and recent developments show the asset continues to get weirder and wackier. Bankers should encourage more of this and investors should welcome the deals — such perfect conditions may not last.

In perhaps the most illustrative example of this trend, Sotheby’s Financial Services’ debut ABS deal in April arrived to 3.5 times oversubscription and was increased by $200m increase as institutional investors were eager to get into fine art lending. The deal had been in the works for a some time, with SFS building a warehouse finance facility and fine tuning its technology while preparing for the securitization.

In the wake of the this deal, other players in the art market are also understood to be looking at SFS’s deal and debating if they want to find ways to draw in institutional investors.

Other brand new sectors are gradually making their way towards the private market. For example, Nilly, a company that offers collegiate athletes an advance on their name image and likeness payments in exchange for seven years of profit sharing, plans to one day bring a private securitization of those contracts from college athletes.

Solar ABS has done such a good job of establishing itself as an asset class that it almost feels churlish to describe it as "esoteric". But that doesn't mean it doesn't continue to innovate.

A new era dawns for the asset class after the entry of EverBright and Enfin to the market in March. Unlike the fintech-style issuers that gave birth to solar ABS, these deals came from subsidiaries of larger players in the solar industry: EverBright from capital infrastructure investor NextEra Energy and EnFin from panel manufacturer Qcells.

The deals indicated a maturing in the solar sector, with new players arriving with the backing of large parents.

Esoteric deals are generally attractive to investors because their unusual, often complex nature means that they tend to offer better returns when compared to similarly rated tranches in more run-of-the-mill sectors like auto and credit cards.

So far this year, esoteric ABS new issues have found strong demand across the board, with deals consistently pricing tight to guidance, according to Finsight. This has been occurring in more prolific sectors like solar, data center, device payment, and rental car ABS, and also in rarer species such as aircraft receivables and shipping containers.

It was therefore perfect timing for investors to be bidding for the Sotheby’s securitization and to persuade them to turn their attention to genuinely new things.

But it is not clear how long this will last, especially with the US presidential election looming in November. No matter who wins, there is likely to be volatility in the run-up and aftermath of the vote. Perhaps a victory from Joe Biden would be less chaotic than one from Donald Trump, though even that is not clear, but in unpredictable times investors are likely to be running towards predictable asset classes.

And the recent rates sell-off, just when the market had appeared to come to some consensus that the momentum was positive, shows that the inflation problem is going to linger — and esoterics are likely to be the first to struggle if there's a serious downturn in sentiment.

This all makes it a good time for ABS to get weirder and wackier ABS. Bring them on.

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