As the American Securitization Forum’s 2013 conference began its second day, a cluster of grey clouds hung over the Las Vegas strip.
But inside the Aria Hotel, attendants were far from somber.
Indeed, in marked contrast to recent years, speakers at the first major panel of the day sounded some fairly upbeat notes.
Michael Binz, a managing director at Standard & Poor’s, said the degree of enthusiasm in the securitization market was where it had not been in years. "A year ago, the mood was starkly different," he said. "There were fewer investors particiating, supply was rapid diminishing, and regulatory uncertainty was stifling market activity."
By comparsion, "Today many sectors of the market are rallying, investors have returned, there's a level of enthusiasm and demand we haven't seen in years." Also, "there's a degree of regulatory certainty taking shape."
One of the most salient manifestations of that has been an extraordinary tightening in spreads on structured products across a number of asset classes.
“Last year was a good year for spread products,” said Gagan Singh, chief investment officer at PNC Bank, a view echoed by other panelists. The tightening, he said, was both “justified” and “a long time in the making.”
Strong liquidity, courtesy of exceedingly low interest rates, an improving macro-economic picture, and falling volumes of outstanding deals have all played a part in compressing spreads, panelists said.
But after such a strong rally in 2012, Singh said, certain asset classes are already looking rich. This year, sector and security selection willl be important.
One sector where spreads are likely to keep tightening, panelists agreed, is collateralized loan obigations. That's partly because CLO spread tighening to date has lagged that in other sectors, such as commercial mortgage backed securities. Leland Hart, a managing director at BlackRock, said scarcity of loans that are good candidates for CLOs will also contribute to further tightening.
“The demand side is not in question whatsoever,” Hart said.
There are technical factors that may other sectors from widening much if at all this year. In RMBS, for example, Peter Sack, a managing director at Credit Suisse, noted that amortization is running ahead of new production. Healthy issuance
On the issuance front, Sack predicted more private label RMBS this year, although he pointed out this wouldn’t be a difficult feat given the paltry $3.5 billion placed last year.
DBRS Managing Director Claire Mezzanotte said she expected many asset classes to see healthy issuance. Volume in credit card ABS would likely go up slightly, she added, with Canadian issuers likely to make their presence felt.
The auto sector — which has taken off this month — would also see more deals this year, according to Mezzannotte. But she warned that standards may start to slip in origination as competition among lenders grows more intense. “We’ll be looking at that 2012 vintage carefully,” she added.