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Weekly Wrap: Fixed income analysts eye shades of potential 'blue wave'

In a web seminar on the 2020 election outlook last week, the fixed-income team at JPMorgan Chase noted the common belief that a blue wave could sweep through the polls on Tuesday, with Joseph Biden maintaining a wide lead for the presidency.

Should that wave emerge, what may be of most importance to investors and issuers may be the shade it takes, according to JPMorgan, whose analysts cautioned the market may be underestimating the result of that variance.

In the panel discussion, analysts noted that instead of factoring in only on whether or not Biden wins the electoral college battle, the market should also be examining if a Biden victory would be the result of a “light blue” vs. “dark blue” groundswell.

In the light blue scenario of a Biden win, Congress remains split between a Republican majority in the Senate and a Democratic majority in the House after election results are tallied. And, following inauguration in January, Biden follows through with expectations he would make centrist appointments for key cabinet positions for the U.S. Treasury, State and Commerce. Those positions which might even yield moderate Republican appointments by a Biden administration intent on spurring bipartisan reconciliation.

Joe Biden, 2020 Democratic presidential nominee, smiles while speaking during a drive-in rally at the Iowa State Fairgrounds in Des Moines, Iowa, U.S., on Friday, Oct. 30, 2020. Days away from the presidential election, polls give Biden the biggest lead over Donald Trump since Barack Obama trounced John McCain in 2008, yet web searches in the U.S. suggest voters are squarely focused on gauging how Trump may still find a path to victory. Photographer: Rachel Mummey/Bloomberg

Biden could then appoint more left-of-center cabinet members to Housing and Urban Development, Health and Human Services and Energy as a concession to the progressive wing of the Democratic Party, the report says.

But if a Biden victory over Trump also coincides with a Democratic majority elected to the Senate, the JPMorgan panel speculated it will spur the progressive wing of the Democratic Party to issue further demands – such as enacting measures for the Green New Deal, Medicare for All and the introduction of a carbon tax.

“The anti-Trump sentiment has been a strong unifier for the Democrats during the election campaign,” according to a summary of the panel discussion. “Investors are currently underestimating the short-term impact of the noise,” in regards to policy and regulatory impact on the energy and financials industry.

Investors have been “reluctant” to “price in” their market bets for a potential for a Democratic takeover of the Senate due to a wide range of potential outcomes in those races (where the Democratic advantage is estimated between 1 and 6 seats).

And while the analysts discounted the potential for extended ballot counting periods and litigation to delay final election results past Tuesday, they did not downplay President Trump closing the polling gap on Biden to overtake the Democratic nominee to win re-election with a strong election-day showing from his supporters (70% of Trump supporters indicating they plan to vote in person on Tuesday).

“Though most commentary focuses on the potential for Trump to outperform his polls, the distribution of polling errors are likely at least somewhat symmetric,” according to the summary. “That means markets should also consider the potential for Biden and Democratic Congressional candidates to outperform, and what the implications of such a landslide and legislative mandate would mean for the policy outlook.”

“But it is worth bearing in mind that down-ballot races, particularly in the Senate, are much more highly correlated to Presidential results than even a few cycles ago. Uncertainty, as priced into options markets, should be tied more to the joint probability of a Democratic or Republican sweep than a Biden/Trump horserace, since the former has much more important implications for policy.”


Perella sees 2021 bust as cash runs out

Companies piling on debt to get through the pandemic may end up starting a bankruptcy wave in the second quarter next year if Covid-19 drags on, says Perella Weinberg Partners Group LP’s restructuring chief.

“Companies that have historically been able to raise liquidity won’t be able to continue to withstand the operating and liquidity pressures of an extended pandemic,” Bruce Mendelsohn, partner at Perella, said in an interview.

After a recent slowdown in filings by large U.S. companies, Mendelsohn predicts a spike in bankruptcies in the second through fourth quarters of next year, with malls and retailers among sectors at risk. The recent slowdown in filings follows government stimulus which added to the “robustness” of capital markets, he said.

There have been 211 bankruptcy filings year-to-date by companies with more than $50 million in liabilities, according to data compiled by Bloomberg. That’s the most since 2009, when there were 247 in the comparable period.


Solar panel market surge

Loanpal is seeking to price its third solar-loan securitization since June, reflecting a resurgence of solar-panel financing activity that took a short stumble during the onset of the coronavirus outbreak this spring.

According to a ratings agency presale report, Loanpal Solar Loan 2020-3 is a $346.73 million transaction involving 11,860 loans with an average balance of $36,636.

Credit enhancement levels have lowered for all three classes of notes being offered in Loanpal 2020-3. But due to ongoing COVID-19 economic risks, Kroll’s base-case loss range of 8.1%-10.1% is elevated compared to its three prior deals this year.

The loans have a weighted-average seasoning about approximately three months – which is the back-end of a five-month period in which Loanpal has seen loan-approval volume boost each month and feed its latest esoteric ABS offering. After experiencing declines in applications and approvals in the second-half of March, Loanpal saw approval volume exceeding pre-COVID-19 levels as soon as April. T

The $338.9 million origination volume in September is a monthly record for Loanpal, according to Kroll.

Issuance volumes down across the table

Heading into the final two months of a pandemic-stricken 2020, new-deal issuance of mortage- and asset-backed securities is (unsurprisingly) pacing behind 2019's volume levels by a substantial margin.

In its weekly securitization research report, Deutsche Bank notes that non-agency RMBS is down 18% compared to the first 10 months of 2019 -- making it the asset-class that is closest to approaching last year's issuance level. Non-agency RMBS deals totaling $90 billion have priced, compared to $110 billion in 2019 which had a total-year deal volume of $135 billion.

For commercial MBS, the deal volume of $54 billion thus far in 2020 is 38% below the $87 billion in volume through this time a year ago (and on its way to $117 billion). CMBS deals have had the sharpest drop off from 2019 of any structured finance asset class.

The $158 billion in asset-backed securities offerings in 2020 is down 25% from 2019 ($210 billion, with total year deal volume reaching $233). For collateralized loan obligations, deal volume is down 31% – at $69 billion in deals this year, compared to $100 billion through October 2019.
Domino pieces standing in a row. 3D illustration
Domino pieces standing in a row. 3D illustration.

New issue pipeline

Issuers filing ABS-15G registrations for new-issue U.S. ABS for the week of Oct. 23-29 (per Finsight.com)
CMBS Citigroup Commercial Mortgage Trust 2020-420K Citigroup
AUTO Ally Wholesale Enterprises LLC Ally Financial
AUTO GMF Canada Leasing Trust GM Financial
CMBS Grace Trust 2020-GRCE
CMBS Sage AR Funding No. 1 PLC
ESOT Navient Private Education Refi Loan Trust 2020-H Navient Corp
SLAB NAVSL 2020-H Navient Corp
ESOT GS Mortgage-Backed Securities Trust 2020-RPL2 Goldman Sachs
ESOT GPIF 2020-B Gracie Point
CMBS FREMF 2020-K119 Mortgage Trust Freddie Mac
ESOT GCPAF 2020-1 GC Advisors (Golub Capital)