A banner year for asset-backed supply, combined with a deluge of negative headlines has researchers mixed on the supply outlook for 2003. All agree, however, that current spread levels will contract in most sectors during the first half of the year. As was the case heading into 2002, the wild card is the home equity and mortgage-related sectors of the ABS market, which accounted for a greater-than-expected $150 billion in 2002.
The market proved that it is no longer bulletproof, as the failure of NextBank N.A. early in the year and the blowup at National Century Financial Corp. nine months later illustrated the new world of risk investors must now factor into the valuation process. Conseco Inc.'s bankruptcy re-affirmed the growing awareness that a servicing transfer is not always a simple process.
Though coming off the third consecutive year of double-digit growth 17% in 2002 according to Salomon Smith Barney for the first time in the history of the market, some expect new issue supply to slow or even decrease amid the persisting economic uncertainty. Although the ABS market remains attractive for issuers and fixed-income investors alike, rising rates and leveling off home prices should slow origination growth going forward, particularly for mortgage-related ABS.
JPMorgan Securities pens in its 2003 outlook that home equity ABS may actually decrease this year, as interest rates rise and housing prices stabilize. "We expect the home equity sector to account for the bulk of the contraction as mortgage rates drift higher, the refinancing wave subsides, and home price appreciation slows."
Merrill Lynch & Co. agrees to some extent, but is less bearish than JPMorgan. "The primary drivers of record HEL supply in 2002 will continue in 2003 but should cool off somewhat," note Merrill researchers. "While relatively low rates should persist, we are already seeing some burnout of refinancing, and originators are being forced to lower margins to maintain production levels. Slower home price growth should also reduce cash-out refinancing incentives."
While predicting a 10% across the board increase, Salomon believes issuance will slow despite the lofty expectations of many mortgage lenders. The slowdown, however, is not anticipated until mid-year. "Loan production," the researchers add, "will likely run into economic headwinds around the middle of 2003." In the first half, business should remain brisk, as the pipeline of newly originated loans remains full.
Banc One Capital Markets agrees with Salomon, adding, "we anticipate only about $110 billion [of HEL supply] coming to market, representing about a 20% decline in volume. "We think much of the collateral backing
2003 deals will be overhang from 2002, and we expect first half supply to be heavier than later in the year."
Much like early last year, analysts recommend investors take advantage of the current cheap prices in some sectors of the ABS market, but to be cautious in name selection, as spread tiering among issuers is becoming more pronounced. This selective widening, it was noted, can be a positive for careful investors.
"[Headline risk] is not going away," said BOCM researchers. "Its impact on valuations will continue for the foreseeable future. Still, headline risk often creates opportunities too. We expect investors to have plenty of these opportunities in the coming year."
Auto loan and credit card supply, said Banc One researchers, should stay flat to slightly higher this year, while a major increase in student loan ABS is expected. The manufactured housing sector, plagued by floundering issuers and overcapacity, will dry up at most, with most estimating approximately $3 billion in 2003. The "other" category, including equipment lease ABS will likely decline in volume, although issuance of foreign Australian and U.K. MBS should remain strong and account for the bulk of this asset class.
The auto and credit card sectors will be dominated by the current market leaders, such as captive finance companies leading the way for autos, while de-linked issuance trusts will continue leading the way in cards. While the spread differential between securitized and unsecured funding has narrowed, major players are still leaning heavily on ABS for funding.
The de-linked issuance vehicles adopted since fall of 2000, which currently account for almost 20% of outstanding credit card supply, allows issuers the flexibility to take advantage of investor demand.
"There is perhaps a lack of natural buyers for seven-year and longer maturities, particularly for subordinate tranches," notes Credit Suisse First Boston. "Perhaps the de-linked structure used by the many of the majors will allow a more tailored approach to take advantage of the issuance opportunity available in seven- and ten-year tenors."
A decrease in bankruptcies and stabilization of losses should help the credit card sector. Supply estimates for this year range from the mid-$60 billion to mid-$70 billion range, in line with the roughly $70 billion seen last year.
As Banc One points out, there is no direct link between new auto sales and auto ABS volume. "Although new sales are likely to slow, we believe the captives will probably issue at least as much public ABS as this past year, and probably more."
With unsecured debt markets drying up amid ratings pressure for both auto manufacturers and independent finance companies, securitization will make up the bulk of the funding for auto lenders in 2003. Most researchers theorize the auto sector will see anywhere from $90 billion to $100 billion this year, up from the $85 billion seen in 2002.