Late cycle ABS holding up, amid fears of fleeting liquidity

The securitization market is in a good position from both the perspective of credit quality and structure as the credit cycle heads into late innings, an industry panel heard on Wednesday, but there were fears over the possibility of a sudden liquidity crisis when the market turns.

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“Credit fundamentals and the structures work. The thing that worries me is liquidity,” said Janet Oram, head of European ABS at BlackRock. “My feeling is that there is a lot of money that could go away... and we don’t have the depth of a secondary market to absorb large outflows.”

An idiosyncratic market event or a sudden change of investor appetite, specifically from funds that offer investors daily liquidity, is an event that could potentially cause the securitization market to “fall over”, Oram said.

Bank of America managing director Alex Batchvarov was similarly unsure about the investor outlook, but more from the perspective of what new regulation has done to suck some of the appeal out of ABS. He said that overly prescriptive rules and the work that needs to be done around things like STS might cause investors to turn away from the market.

Batchvarov was pessimistic in his view of what STS was doing for the market, stating that the internal conditions of the European securitization sector would hold it back, possibly indefinitely.

“In the first quarter, what could have been STS issuance was down 90%. It makes me very sceptical that the market can catch up in the rest of the year. The much proclaimed recovery of the securitization market may not happen,” Batchvarov said.

On the upside, the speakers generally agreed that the market was in better shape to weather the next downturn, whatever form it may take.

“Underwriting generally across Europe is still strict compared to the last crisis,” said Susanne Matern, managing director at Fitch Ratings. “One could argue that there is less headroom for monetary policy pressures…Nevertheless, the market is still in a strong position if the base case materialises.”

Moody’s managing director Neal Shah added that he agreed the market is performing well, and standardization and more vanilla structures are becoming the norm. He warned, however, that some cracks were showing.

“You aren’t seeing tiering between good and bad credit. Outside of the consumer market, though it will eventually hit consumer markets, you are seeing increased leverage and risks coming through,” Shah said.

In a poll of the audience at the end of the talk, attendees flagged CLOs and leveraged loans, CMBS and southern European RMBS as the sectors most vulnerable in the next downturn.