Esoteric asset classes such as aircraft leases and whole business securitization are starting to attract more attention from traditional investors in high yield corporate bonds, according to panelists at a securitization industry conference.
Yields on both junk bonds and esoteric asset-backeds have been rising as skittish investors demand additional compensation for taking on any kind of risk; yet bonds backed by restaurant franchises and aircraft leases have higher credit ratings.
Amanda Magliaro, a managing director at Citigroup, said many investors are looking to build out their transportation portfolios. She noted that aircraft leases are being used to back bonds with tenors of as long as five years and ratings as high as single-A for senior notes.
Esoteric ABS is also becoming a more attractive to potential issuers, Magliaro said. “It makes a lot of sense to access a market to finance at 6% or better when you consider the depth in high yield market right now.”
Tony Nocera, managing director for Kroll Bond Rating Agency and another panelist, noted that there’s been a lot of evolution in aircraft lease space since 2012. More and more deals are backed by leases deals for older, “end of life” aircraft. Change is “not so much structure but the aircraft themselves in the pools,” he said.
Cory Wishengrad, head of structured products origination at Guggenheim Securities, talked up whole business securitization, one of his firm’s specialties. Bonds backed by the entire cash flow and intellectual property of a company are trading at yields some 10-15% wider than they were a year ago, despite offering strong protection, relative to junk bonds and equities, with ratings in the triple-B area.
For some investors, however, credit ratings are less meaningful in an asset class with such a short track record. “We look at the potential for cash flows to exist in the future,” as well as recovery prospects, said Aashh Parekh, managing director and head of structured finance research for at TIAA-CREF.
“We don’t want to own 10,000 [franchise] locations that aren’t worth anything,” he said.
Speakers at a separate panel that took place Sunday put esoteric ABS issued for 2015 at some $30 billion. Whole business deals represented the largest segment, at about 20%. The figures also include aircraft lease, loans funding energy efficiency upgrades and intellectual property. They do not include equipment lease ABS, which was once considered to be fairly esoteric but has become sizeable.