Although the consumer ABS market is 3.7% ahead of its 2010 pace at the midyear point with $55.6 billion of new consumer ABS issued in 1 H11, several macroeconomic factors continue to plague the sector, according to a Wells Fargo Securities report released yesterday.
The weak economy and housing market, as well as the threat of impending regulatory reform, lack of consumer confidence, and structural changes to securitization, were among the issues listed as affecting ABS. The report also stated that because of a combination of these factors, outstanding consumer ABS has decreased by 25% since 2007. Wells Fargo analysts believe that this market reduction has damaged both investor interest as well as the availability of liquidity.
However, consumer ABS issuance for the year is still expected to reach predicted levels. Wells Fargo analysts said that current interest rates have served as an indication that economic recovery is slow, but maintained that consumer ABS is still on track to reach Wells Fargo's expected issuance level of $105 billion for 2011. Analysts also said that the "relentless, secular" tightening of consumer ABS spreads would stop.
Credit fundamentals have continued their upward trend, enjoying lower default and loss rates on consumer ABS, analysts noted. These positives also include continued sound structural protections in deals as well as more ratings upgrades than downgrades.
According to the report, ‘AAA’ credit card ABS spreads have tightened significantly in 1H11. Meanwhile, off-the-run asset classes including subprime auto loans and rental fleet securitizations have received much less sponsorship, analysts said. They recommended that investors “position themselves to take advantage of wider spreads if presented with them based on general financial market conditions.”