Five years after the sub-prime mortgage crisis nearly destroyed it, the US asset-backed security (ABS) market is booming. In the week ending March 15, $7 billion in transactions came to market and estimates for total 2012 issuance are expected to reach as much as $150 billion to $180 billion – up from earlier forecasts of $135 billion. Investors are also willing to go down the credit curve.
"New-issue levels for subordinates have been compressing in the 10s to 20s of basis points," says Gerry Keefe, head of securitized products for the Americas at Citi. "The window is wide open."
John Cho, head of autos and equipment ABS at JPMorgan, agrees that appetite for subordinated debt has improved. "Last year, the bid for subordinated bonds was very weak, but we are seeing a much more positive reaction to the subordinated tranches in transactions, reflecting improved investor sentiment and a greater appetite for yield."
Although spreads have come in, Keefe says that issuers should be able to maintain them at current levels given supply-demand technicals and a recent move in rates.
"Treasuries have sold off as it becomes clear the Fed is likely to wind down quantitative easing, given gains in employment and other economic indicators," says Keefe. "This has provided investors with some incremental yield and should support current spreads in ABS, in addition to potentially driving issuers to print in unsecured sooner than later."
Cory Wishengrad, co-head of securitized products origination at Barclays Capital, says the non-traditional ABS issuers have been enjoying increased investor appetite.
Domino’s Pizza, for example, had its March $1.475 billion deal increased to $1.575 billion, and the bonds ultimately priced at a yield of 5.25% – tighter than the original whisper guidance in the area of 5.5% – based on strong demand. It is the largest whole-business securitization since the credit crisis – and more than $1 billion larger than the Sonic Drive-In transaction last year.
"If you look across the fixed-income market with rates low and spreads in more traditional consumer ABS tightening, as well as spreads snug in investment grade and other liquid asset classes, it is understandable that investors are looking to non-traditional ABS," says Wishengrad. "It is a way to earn more yield which does not require buying longer-dated securities or going down the capital structure."
| US ABS issuance recovers in 2012 |
| Year to March 15 issuance comparisons |
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| Source: Dealogic |
The non-traditional ABS deals, while single-A or triple-B rated, typically occupy the senior tranche in the capital structure, and performed well during the credit crisis. "Investors like these deals from a risk/return standpoint," says Wishengrad, noting that traditional ABS tranches rated single-A or triple-B are generally subordinated in the capital structure and yet price at tighter levels.
He says that the majority of investors are insurance companies and money managers that are comfortable with five- to seven-year maturities, and have internal capabilities to evaluate credit and structure. Domino’s had almost 60 investors.
That said, Wishengrad says the non-traditional ABS market is not likely to balloon in spite of the demand from investors. "The ratings process is extensive, so there is going to be a lot of lead time before we see more transactions."
While the ABS market might be only a fraction of what it was before the sub-prime meltdown, the overall trend is improving.
Dave Duzyk, head of ABS at JPMorgan, says: "If you look at 2006, when there was about $750 billion in issuance, $500 billion of that was in sub-prime which isn’t coming back, so $250 billion was in regular ABS. That was at a time when consumer confidence was high and the economy was healthy.
"If we see $150 billion this year, then that shows we are not back to that scenario of a healthy economy from a consumer standpoint, but it’s more than we have been seeing since the meltdown."
