If you believe the dictionary, esoteric ABS should rarefied, puzzling, mysterious, or enigmatic.
Yet, in the face of market giddiness after the shock of ‘liberation day’, the asset class has in fact turned out to be fairly steady, predictable and — dare one say it — reliable.
After a couple of quieter — though not completely silent — weeks in the wake of April 2, issuance has picked up solidly and continued to gather ground. May issuance volumes of esoteric ABS are, according to Finsight, already at $6.5bn — more than the whole month of April and closing in rapidly on the comparatively idyllic times of January ($8.6bn) and February ($8.6bn).
On one hand, it speaks to the allure of the asset class to investors. The insurance capital that drives demand is now often able to pick up exposure to the same assets, often at higher all-in yields.
But perhaps most importantly, it suggests that esoteric ABS issuers — rather than being mysterious creatures — are taking on some of the qualities of their so-called "on-the-run" cousins.
Namely, they are proceeding to market in a rather programmatic fashion even when their all-in cost of financing is, quite frankly, more or less all over the place: up to 40bp higher on the seniors in one sector, up by between 25bp and 30bp in others and flatter in others.
Moreover, under the hood there are competing forces to deal with. While spread tightening, as seen in recent days, has put downward pressure on yields, Treasury rates — which, as of Tuesday afternoon across the three, five and 10-year tenors sat higher than April 2 — are having the reverse effect.
It was only a couple of weeks ago that lower benchmark rates were compensating for at the time higher spreads. In short, it's not a simple picture for issuers.
Yet they continue to push ahead and achieve notable results.
Take the two Zayo deals that DigitalBridge brought in January and May. The yield on the senior notes on the May deal, ZAYO 2025-2, came in 30bp higher than level on the first Zayo deal in late January.
Consumer loan ABS has also seen a mixed bag, with Pagaya forking out 17bp more of yield on the senior note in its May deal versus January.
This is a meagre increase in cost on the senior notes, considering the journey the market has been on.
Perhaps most encouragingly, debut issuers continue to emerge. Consolidated's fiber deal last week was a rousing success, while even the troubled solar sector produced a first-timer at the height of the volatility, in the shape of Palmetto.
Especially in areas like data centers, fiber, solar and consumer lending, issuance is following the cadence of some of the most long-established corners of securitization. It begs the question if the lumping some of these emerging sectors under the "esoteric" banner is not a little unhelpful.