Is mobile phone financing the next frontier in securitization?
Valerie Kay, a managing director at Morgan Stanley, sees potential. She pointed to a change in the way that wireless providers sell handsets; they are moving away from subsidizing a new device for customers every few years to allowing customers to make installment payments on their phone bills.
“Some asset light companies are about to become asset heavy companies,” Kay said at a panel on esoteric asset classes at IMN’s ABS Vegas conference on Sunday. “At some point, perhaps they may look to do something to finance off balance sheet.”
Morgan Stanley is looking for growth in another esoteric asset class, one that has had trouble getting back off the ground since the financial crisis: aircraft leasing. The firm is forecasting issuance of $4 billion to $5 billion of aircraft lease backed securities in 2015. That would be up from $3 billion in 2014 and just $1.7 billion in 2013. Kay noted that enhanced equipment trust certificates, an alternative form of financing, had a record year in 2014. “People are now turning to leases because they are non-recourse,” she said.
Nichol Merritt, director of private placements at TIAA CREF, is also expects to see more aircraft lease deals this year; she expects that they will be backed by smaller planes from lesser-known manufacturers, as was the 2014 vintage.
Panelists also talked about their wish lists. Kay would like to see more securitizations of triple net leases, which are properties with tenants that pay taxes, insurance and other maintenance costs, in addition to rent.
And TIAA-CREF is interested in royalty deals. “If someone has any, please show me,” Merritt quipped. As a former investor in private placement corporate debt, she likes the fact that securitization of royalties “has a corporate feel to it,” because a single company is making the payments. “We take comfort in who’s on the other end.”
She also put commercial Property Assessed Clean Energy (PACE) bonds on her wish list.
Merritt noted that, as an insurance company, TIAA-CREF cannot invest in a securitization unless it has a credit rating. The National Association of Insurance Commissions will provide its own rating on corporations, but not securitization trusts. But unlike some other kinds of institutional investors, insurers can invest in deals with a single credit rating. “It can be any of the five,” she added.
It can be challenging for new asset classes to obtain a credit rating. Violet Diamant, a managing director at Morningstar Credit Ratings and the third panelist, said that her firm is looking closely at marketplace funding, also known as peer-to-peer lending, as well as PACE securitization.
The most recent securitization of marketplace loans, Consumer Credit Origination Loan Trust 2015-1, which priced last week, snagged a Baa3’ rating from Moody’s Investors Service for its senior tranche. The deal, backed by loans originated on the Prosper Marketplace that were purchased by BlackRock, was said to be heavily oversubscribed. “Interestingly, spreads were in line with those of earlier, unrated transactions,” Diamant said. She speculated that, as expected losses in the asset class come down, enabling deals to obtain higher credit ratings, there will be some eventual tightening in spreads.