Though typically the U.S. asset-backed market all but shuts down following Thanksgiving break, this year's early Turkey Day and a deluge of deals delayed post-Sept. 11 should promise a few more active weeks of issuance.
Sources anticipate that the two weeks following Thanksgiving will see some hefty supply, relative to the time of year. Deals are already in the works from GreatAmerica Leasing, MCG Capital (see story p.4), Franklin Auto and Provident Bank, to name a few, as issuers that were previously unable to attract investor attention amid massive benchmark issuance are now prepping their deals.
Additionally, analysts note that a refinance boom is expected to stimulate originations of both home-equity and student loans, leading many to think those sectors will see disproportionate volume into the middle of December. Most bankers interviewed expect issuance to fizzle sometime before or during the week of Dec. 10, with the Christmas exodus to follow.
A look back at 2001
The U.S. asset-backed securities market performed extremely well in 2001, setting record new-issue volume by the start of the fourth quarter.
Year-end volume is estimated at over $350 billion, which would make 2001 the third record-breaking year in a row - evidence that securitization has become a viable funding alternative for companies hampered by credit concerns.
Even with increasing volume, the secondary market showed remarkable resiliency through most of the year, driven by investor demand for triple-A-rated corporate paper as well as demand for lower-rated notes from the fastest-growing sector within securitization, collateralized debt obligations (CDOs).
The increase in volume was due primarily to increases of 25% or greater in the backbone sectors in the market: auto loans, credit cards and home-equity loans. And despite a decrease in student loan securitization, increases in stranded cost and previously non-conforming RMBS-related assets boosted volume totals. In the private sector, CDOs contributed an additional $34 billion of supply.
Corporate concerns
Corporate credit concerns have caused unsecured spread volatility for most of the year, leading issuers to add securitization to the funding mix. For example, benchmark ABS and debt issuer Ford Motor Credit altered debt and ABS issuance on a quarterly basis. ABS issuance from Ford increased by over 50%, totaling $20 billion as of late November, up from approximately $13 billion in all of 2001.
Overall auto issuance surged this year, spurred by corporate credit woes, with more than $66 billion of supply in 2001. This is mainly because the Big Three all had pressure applied on their unsecured ratings and borrowing costs had risen; as a result they combined to sell over $30 billion of the sector total. The largest one-time securitization in U.S. ABS history occurred in mid-July, as Ford priced two wholesale floorplan deals simultaneously, totaling $5 billion.
Separately, Japanese captives Nissan and Honda emerged in 2001 as sector benchmarks, pricing on par with their American counterparts. In non-prime markets, AmeriCredit developed a reputation as the top issuer and was able to sell its first un-wrapped senior/sub transaction.
New structures
Structural innovations within the credit card sector led issuance higher as the ability to de-link senior and subordinated tranches was adopted by the two leading companies in the sector, Citibank and MBNA. This streamlining allowed for greater ease in opportunistically accessing the market; once the subs are placed, the issuer can then bring large pieces of triple-A paper, when rates and spreads are favorable.
Developed in late 2000, Citibank's "block & trap" de-linked structure prompted the sector's next largest issuer, MBNA, to follow suit with its version, dubbed "MBNAseries." In early May the company sold single-A and triple-B-rated notes that led to the sale of $1 billion of pre-enhanced senior paper.
Although it was thought that only a few of the largest issuers in the market had enough critical mass to sell credit card-backed notes in this fashion, retailer Saks Inc. pre-placed subordinated paper and followed with a $300 million offering in the following weeks.
Driven by continually lower interest rates and the emergence of agency-conforming collateral, the home-equity sector saw record originations, leading to just about $100 billion of supply. Also boosting issuance, the widespread acceptance of foreign RMBS collateral by the U.S. investment community has led to the sale of U.K., Australian, Swedish and New Zealand RMBS this year.
Held up by legal disputes throughout 2000, stranded cost securitization finally broke out this year, pricing over $7 billion of paper, ebbing into the market during - and partially boosted by - the most troubled time in the modern history of U.S. energy markets: the California electricity crisis.
The first stranded cost deal of the year, $2.5 billion of stranded cost paper from a vehicle of New Jersey-based Public Service Gas & Electric, actually benefited from the near insolvency of Edison International and Pacific Gas & Electric, educating investors about the differences in regulatory environments.
"New Jersey's situation is different from California," company spokesman Paul Rosengren said prior to the deal's offering. "Unlike California, price risk has been transferred to a subsidiary with its own generation equipment and locked in fixed-rate per kilowatt prices for the next three years."
The success of this offering led to the opening of the floodgates in the sector, and large deals from Detroit Edison, Reliant Energy and CMS Energy followed throughout the year, joined by a smattering of smaller deals as well. Unlike most sectors, however, once the window is closed, it is not expected to reopen any time soon, as just about any company that could securitize stranded costs has done so.
CDOs
This was a robust year for CDOs as well, despite the sector being mired in a record number of downgrades, including several triple-A tranches; ironically, however, the product continues to boom with more and more dealers setting up CDO platforms.
While high-yield bond deals used to dominate the landscape, the second half of 2001 saw synthetic, cashflow, investment-grade and structured finance/multi-sector deals capture a significant piece of the market. While ABN Amro's jumbo balance-sheet CLO will help push the dollar volume of issuance, Moody's expects 2001 CDO volume to be slightly lower than last year, due to less balance-sheet volume, but the number of transactions is up significantly in 2001 - 189 so far this year versus the same number for all of last year.
Moreover, the growth of multi-sector CDOs has boosted demand for triple-B RMBS, CMBS, and ABS bonds greatly in 2001. For example, in some cases, off-the-run credit cards have seen the triple-B tranche nine-times oversold - the result of nine ramping CDOs each bidding for the entire tranche.
Lastly, corporate bonds (investment-grade. and high yield) still account for the majority of the CDO collateral, based upon end of third quarter statistics. Of the total global dollar volume in CDOs, 67% of collateral is bonds, 31% loans and 2% emerging market debt.
Post-Sept. 11
As was the case in most markets, everything changed in ABS after the events of Sept. 11., but securitized markets have held up nicely after some initial widening. With the exception of the WTC CMBS that had yet to settle, there have been no significant failures as a result of the attacks.
Even one new issue, a stranded cost ABS from Reliant Energy that was set to price that fateful Tuesday, came back in the market shortly after trading resumed and completed successfully, albeit with a slight concession. Two of the companies most directly impacted by the events, American Airlines and Delta Air, each sold EETC in the post-Sept. 11 market.
The one development that will carry into next year, analysts note, is the issuer tiering that has grown from investor concerns over consumer credit exposure. Sector benchmarks such as MBNA, Ford, DaimlerChrysler, Chase Auto, Honda and Countrywide Home Loans, all brought offerings in the weeks immediately following Sept. 11, adding liquidity and price discovery to a market in need of guidance.
While offerings from off-the-run names have also returned - Metris and CarMax, for example - yield spreads have been up to 20 basis points cheap versus the benchmarks. But with Treasury yields near 10-year lows, issuers are throwing spreads out the window and taking advantage of low the all-in cost of funding.
