(Bloomberg) -- Sales of debt backed by everything from auto loans to airplane leases to Subway franchise fees have hit their highest level since the financial crisis, as banks try to meet new capital rules and insurance companies clamor for higher-yielding debt.
Asset-backed securities sales have topped $316 billion, surpassing 2021's $312.6 billion, data compiled by Bloomberg shows. According to
The heavy issuance partly stems from banks offloading loans from their books ahead of new capital rules, bundling the debt into bonds they can sell to investors. The firms could be required to start implementing Basel III endgame rules next year, which in many cases require them to pare back risk and fund loans with more capital, cutting into potential returns.
Investors, including insurance companies, are eager to buy asset-backed debt now and their demand has helped drive issuance. As Baby Boomers retire, they've been buying record volumes of annuities from insurers to fund their retirement. In turn, insurers putting the products together are looking to fund them with bonds offering relatively high yields, low credit risk, and longer durations.
Investors have flocked to exotic asset-backeds in particular — bonds supported by music royalties, revenue from data centers and cell towers, among other cash flows, instead of more conventional collateral like credit card debt. Sales of exotic ABS have jumped to about $89 billion, up from $54 billion around this time last year, data compiled by Bloomberg shows.
"The overall breadth of the market continues to get bigger with more digital infrastructure, music royalties and cell towers and so far investors have been very receptive," said Dave Goodson, head of securitized credit at Voya Investment Management.
Issuers have tied their bonds to ever weirder forms of collateral this year, including internet protocol addresses, personal loans made to art collectors, and loans for cosmetic surgery. Bonds backed by restaurants' assets, including fees from franchisees, have also grown more popular. Sandwich maker Subway sold $3.35 billion of bonds known as whole business securitizations earlier this year — the largest such sale of its kind.
The uptick in securitization sales from banks is most apparent in the auto ABS segment. Banks have sold about $33 billion of auto ABS deals this year, compared with $21 billion last year, Bloomberg-compiled data shows.
"Banks need to free up that risk-based capital ahead of implementation of the pending Basel III endgame framework," Goodson said. "Banks can't or aren't willing to finance as much as they used to and are turning to the public ABS sector."
Bank-issued deals have also grown in size, as some regional lenders have returned to the market after being away for a number of years, said Brian Wiele, managing director and head of securitized products syndicate at Barclays Plc.
The prospect of increased capital requirements and the heightened focus on asset-liability mismatches are in turn creating an opportunity for insurance capital to expand into asset-based finance, said Cory Wishengrad, head of fixed income at Guggenheim Securities.
Insurance capital has been a major theme in credit markets this year, helping to power both corporate and structured debt. Sales of annuities hit an all-time record last year, and jumped by 20% in the first half of 2024 from the same period in 2023, according to life insurance trade group Limra.
"In contrast to short-term bank deposits, the long-dated nature of insurance liabilities for life and annuity companies more closely matches the often longer-dated, less-liquid nature of so-called esoteric assets, relative to traditional consumer assets such as auto loans," said Wishengrad. "As a result, insurance companies and asset managers deploying insurance capital have increasingly sought out opportunities to invest in these 'esoteric' or 'non-traditional' asset classes."
ABS investors have also gotten more comfortable in recent years with the different types of collateral and structures available, according to Mario Rivera, managing director and head of structured products at Fortress Investment Group.
"Investors have just gotten smarter to these different collateral types and as a result, the demand is there," he said. "And so, of course, Wall Street bankers are filling that. That's just one of the natural reasons why volume is up: because there are different esoteric assets to offer now and investors have gotten over the learning curve and have found a place for them."
(Updates ABS volumes in headline and throughout story.)
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