It's been a very active year for non-traditional ABS. Almost $19bn in issuance year to date; higher than the full year in this space for any year since 2007, according to figures reported by Barclays.
The total for 2012 could come in somewhere between $20 and $25bn marking a very active year for the sector, in 2007 total volume in the space came in at just abouve $29bn. ASR caught up with panelists who will speak at next week's esoteric ABS panel at Information Management Network's ABS East conference, to discuss the reason behind the growing volume in the space, how the esoteric ABS sector is focused currently and where it is expected to focus in 2013.
The overall credit market environment, low treasury rates and tight spreads in more traditional asset classes have increasingly caused investors to look outside of auto loans, credit cards and student loans and into different asset classes to find yield, explains Cory Wishengrad, managing director and co-head of Barclays' Americas securitized product origination group.
“These deals offer attractive risk-adjusted returns," said Wishengrad. "In the past, only a subset of traditional ABS accounts was active in this space but today, an increasing number of accounts have become educated on the strong credit performance of these securities and have begun to gravitate towards the incremental spreads they offer relatively to similarly rated assets in the same tenor. As this trend continues, there is opportunity for continued outperformance in the sector.”
Wishengrad notes that private equity firms are becoming more active in the sector, increasingly investing in originators of all types of assets, both traditional and non-traditional. “Given the exit of legacy asset originators in certain sectors and the change in the regulatory landscape, some private equity firms see an opportunity to originate high quality assets which can be packaged into securities and financed efficiently in the securitization market," he said.
Ronald Borod a partner in DLA Piper's corporate and finance group, points to the general lack of liquidity for leverage or equity as another factor pushing issuers into the ABS market. "In many cases the alternatives to ABS execution are severely limited," he said.
Although 2012 issuance hasn't introduced any new asset class into the mix, several new deals are rumored, most notable the hot tipped solar asset class which market participants cite as the source of a lot of buzz at securitization conferences in the past.
Borod said that "surprisingly", ratings continue to play an important role for investors navigating the esoteric ABS space.
"I am working on one asset class where a rating will result in a compression in spread by 300 basis points," he said. "Although surprising based on the public pillorying the rating agencies received for their subpar performance in the subprime space, this is not surprising if one analyzes the superlative performance of rated esoteric ABS between 2007 and the present."
Another point the panel will discuss at next week's gathering is what impact Dodd-Frank will have on the esoteric ABS space.
Despite the still uncertain impact the rulemaking will have that ranges on the issues of risk retention, Volcker, and rating agency reform; Borod believes that esoteric ABS deals have much less to fear from Dodd-Frank than from bad deals getting underwritten.
"The ironical message that I derive from the experience of the meltdown and its aftermath is that esoteric ABS--the one segment of the ABS market that was always seen as marginal and edgy and suspect—has set the standard for responsible underwriting because people were so worried about the assets that they took the time to understand them, whereas the market sectors where assets ceased to matter crashed and burned and brought most of the ABS market with them," he said.