PHOENIX - According to some asset-backed securities experts, issuance will be down about 10% in 2006, from record levels seen last year.
Craig Platt, a director at Keybank, anticipates issuance volume will be flat in 2006 compared to the amount seen last year. Despite continued demand both domestically and particularly abroad for U.S. ABS, experts said a decline in the housing market - the sector that has been a key driver of record-breaking issuance growth in the U.S. ABS market - is likely to put a damper on structured finance issuance.
If home price appreciation slows, and in certain pockets of the country it declines, borrowers will be less inclined to refinance their mortgages to take advantage of accumulated wealth in their homes. Slowing home price growth is coupled with a rising federal funds interest rate, a combination that could lead some borrowers with few refinancing options, ABS West 2006 conference participants here last week speculated.
William Haley, a managing director at ABN AMRO Inc., predicted a 20% year-over-year decline in ABS issuance in 2006.
The ABS market has often managed to bounce back from sector-specific setbacks through both asset and structural innovation, proving analysts wrong by exceeding issuance expectations.
However, Paul Colonna, a senior vice president and head of structured products at GE Asset Management, anticipates a 10% issuance decline because of the Federal Reserve's campaign to tighten excess liquidity in the U.S. market.
"My first thought is that it's always bad to bet against the ABS market ... but I don't think that you can fight rising rates forever," he said.
Mortgage issuers, particularly on the subprime side of the business, have experienced some of the narrowest operating margins yet. The companies are looking to fulfill operating infrastructures that fed on the low interest-rate environment of recent years through a stretch of high volume. Many are finding that they must keep mortgage coupons low, among other accommodations.
Issuers will not be able to maintain so-called "artificial pricing" - meaning that mortgage coupon rates are below the level they need to be for lenders to be profitable - for an extended period of time, Colonna said. Once warehouse lines and whole loan sales begin to compress, issuance at current levels will have to taper off, he said.
"This year is going to be an interesting one in the ABS market," he said.
But while the housing market is expected to at least level off, panelists expect to see growth this year in student loans and ABS CDOs, among other sectors. Securitizations backed by less common asset types - such as intellectual property, tobacco settlements and utility tariffs - are expected to double this year, according to Fitch Ratings. The rating agency reports that more inquiries are coming into its office concerning the viability of new or emerging asset securitizations from across various market sectors.
Largely because of new structural features on the deals and last year's tight spread environment, more investors became interested in non-core ABS assets last year, and issuance rose to more than $10 billion. Fitch is expecting insurance-related securities - such as catastrophe bonds, acquisition, infrastructure project and whole business finance deals - to also increase.
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