ABS issuance will be slightly north of last year’s, according to panelists in today’s 2011 market outlook panel at ASF 2011. The conference is being held in Orlando this week.
J Richard Blewitt, managing director and co-head of securitized assets at BlackRock, pegged issuance at around $105 billion to $115 billion, but he said that the number will still depend on various factors including rating agency scrutiny of legacy assets and collateral performance uncertainty particularly in the private student loan arena, among other things.
Panelists believe that CLOs are going to ramp up because it is cheap enough to support the arbitrage. There was significantly more hope for CMBS issuance, which speakers projected at $40 billion for 2011 while only estimating $2 billion to $5 billion on the residential non-agency side.
Issuance in the residential sector will depend on what happens to conforming loan limits, regulatory reform, and the new rating agency processes, they said.
In terms of CMBS, David Jacob, executive managing director at Standard & Poor’s, said that he predicts only $35 billion for CMBS. He believes that higher rates can actually dampen issuance by $5 billion to $10 billion, adding that the market is seeing more conduit type deals with some single-borrower transactions in the mix. Jacob also thinks that there is opportunity “to clean up” nonperforming commercial real estate assets.
There are some bright spots, particularly in auto land. According to Scott Krohn, director in ABS and long-term funding at Ford Motor Credit Co., his firm is planning to do more ABS in 2011 as Ford is planning to consolidate last year’s market share gains of around !5.3% to 16.4%. He mentioned that the tone of the market has been good, with spreads going back to their mid-2007 levels. Ford issued $11 billion in ABS globally in 2010, and is planning to come to market with $12 billion to $16 billion this year.
Another possible source of volume is the super-senior structures that have returned. The parcing of the super seniors shows the interest of banks in quality securities that have the proper subordination, BlackRock’s Blewitt said.
In terms of the factors that are going to influence ABS issuance and activity this year, most of them will be regulatory in nature. Reed Auerbach, a partner at Bingham McCutchen, mentioned the risk retention rules, which will affect arbitrage between the different ABS players such as the banks and nonbanks. He also cited the Federal Deposit Insurance Corp.’s (FDIC) orderly liquidation authority or OLA under the Dodd-Frank Act, which will even put nonbank under FDIC’s purview.
There is still so much left to interpretation, S&P’s Jacob said, adding that Regulation AB 2 is apt to still give the market some surprises. He also cited the lack of clarity surrounding the qualified residential mortgage or QRM definition.
In terms of non-agency issuance, Martin Hughes, CEO and president of Redwood Trust, said that during the crisis, government intervention was absolutely necessary, including moves like increasing the conforming loan limits.
However, currently the same intervention is stifling the private label mortgage securitization sector. Banks are either selling into the agencies or keeping the loans on their balance sheet. “It is what it is, although it is a game changer,” Hughes said.
The government’s role is keeping the private-label market from being up and going. “Issuance velocity leads to more issuance velocity,” he said, adding that currently there is no triple-A bid for non-agency paper and arguing there should be market for Jumbo paper that is safe and has risk-adjusted yields.
He said that current pricing on Jumbos is 25 basis points to 50 basis points higher than agency pricing.
Other Asset Classes/Covered Bonds
New structures can also be a source of volume, according to panelists. They mentioned hybrid collateral where financial institutions can still get bankruptcy remote treatment while still affording investors recourse to the sponsor. There are also the on-the-run sub classes. For instance, according to Krohn, for Ford’s last auto ABS deal, the subordinates were six times oversubscribed.
Meanwhile, in the mortgage space, Freddie Mac Vice President Mark Hanson said there’s a market for re-performing as well as nonperforming collateral that have undergone loan mitigation efforts.
S&P’s Jacob mentioned esoteric assets such as alternative energy deals, although he fears that these offerings might be subject to Reg AB 2.
As an alternative to securitization, the covered bond market is not the “be all and end all,” according to Auerbach, although he acknowledged that one of the benefits is this structure does not cannibalize sponsors to the point that these firms fail to access the unsecured market.
Blewitt said that the problem with covered bonds is that the collateral is not specific, although investors can exercise their free option to impose strict collateral box guidelines. The problem with covered bonds, he said, is that the quality of the collateral is dependent on the issuer’s fortunes, which can change, and issuers can exercise their options well.
However, investors can probably benefit if they are paid well and there is transparency and liquidity in the collateral.
