Amid the gloom and doom surrounding the just-minted financial reform bill, there still remains a fair amount of consumer ABS trading.
For the more plain-vanilla asset classes such as credit cards, student loans and auto receivables, this might not come as a surprise, although the market is also seeing more esoteric assets being traded on the secondary market.
Sourcing ABS will become increasingly difficult given the shrinking amount of outstanding bonds. JPMorgan Securities analysts said that, as a result, ABS investors should expand into new names and sectors, beyond short triple-A, top-tier prime auto loan and bankcard ABS.
"We see two things: Both the dealers and [Public-Private Investment Program (PPIP)] funds dominated the market in the first half of the year buying for their own books, but they are not looking to buy anymore," said Elton Wells, director of structured productsat SecondMarket. "Many other funds have earned good returns, and they don't want to buy while there is a lot of volatility in the market."
Wells added that, "as a result, the market will likely be stalled out for the rest of the summer, and what we will see is more off-the-run assets being traded with more buyers from Asia entering the fray, something we hadn't really seen before."
In the mix of these esoteric asset classes are municipal bonds, student loan bonds backed by Canadian banks and commercial paper, all of which have traded at the 60 to 70 basis point level. Wells said that one recent medium-term note offering that SecondMarket worked on that was issued out of an AMBACfund, for example, was trading well.
It's unclear just how much potential there is given that many of these deals were initially privately placed. "These are rare, highly distressed, no document, off-the-run assets," said Wells. "We can provide them transparency that they can't get on Bloomberg. We can provide the info that buyers need to make an informed bid."
The appetite in this space stems mostly from nontraditional buyers, although not from insurance companies. The buyers, Wells said, are mostly distressed hedge funds, some based in Asia and some in the Middle East. "In our short amount of time gathering information on the potential for these off-the-run asset classes, we estimate that the volume potential is in the hundreds of billions of dollars," he added.
In the last four months, at least $4 billion worth of assets have come to trade. The wide range across different asset classes showed that the primary market is indeed open to off-the-run sectors.
Sierra (Wyndham) completed its second timeshare securitization for 2010. The deal was well received with strong demand, which also allowed it to be upsized and to price inside of guidance.
The 2.8-year, single-A-rated bonds priced at 275 basis points over swaps (with price guidance at 275 basis points to 300 basis points over), and the Class B, triple-B-rated bonds priced at 425 basis points over swaps (with guidance at 450 basis points to 475 basis points over).
Hertz came to the market with its first new issue in 2010. The deal was upsized from $576 million to $750 million and consisted of six tranches: three classes of triple-A notes and three classes of triple-B notes, structured with maturities of three, five and seven years. The Hertz issue marks the third rental vehicle deal in 2010 following earlier transactions from Avis and Budget.
Supply Forecasts
Still, the changing regulatory environment and the decline in assets available for financing have driven market analysts to re-forecast volume projections for 2010.
They have said that volumes will continue to be affected by tighter underwriting standards. Constrained consumer spending also means little to no receivables growth as well as $130 billion of maturing credit card ABS, which will bring 2010's net issuance volume close to a negative $95 billion. Banks are also increasingly turning to alternative funding sources such as bank deposits, which offer these financial institutions a cheaper alternative to accessing the securitization market.
Bank of America Merrill Lynch analysts revised their supply forecast for ABS, citing slower-than-expected credit card ABS issuance. The firm's new-issue volume forecast for 2010 was revised downward to $120 billion from $150 billion. Analysts also scaled back their outlook for ABCP issuance, shifting the term market to $5 billion from $10 billion.
Wells Fargo Securities analysts reduced their forecast for ABS supply to $125 billion from $150 billion for 2010. They also attributed the decrease in supply to the lack of credit card issuance.
JPMorgan analysts also lowered their overall ABS supply forecast down to $105 billion from their earlier $140 billion estimate, which would have matched supply levels seen in 2009.
The market must also brace for the fallout that will stem from the financial regulatory reform bill.
Barclays Capital analysts said that consumer ABS faces more costs on the back of increased risk retention and more scrutiny under the new Bureau of Consumer Financial Protection.
"We are hopeful that the regulators will consider the strong performance track record of consumer ABS before, during and after the crisis when determining risk retention requirements for these assets," said Barclays analysts. "The [Federal Deposit Insurance Corp.] and [Securities and Exchange Commission (SEC)] have made significant progress with their own rulemaking initiatives, related to securitization Safe Harbor and revisions to Regulation AB, respectively. Both incorporate similar forms of risk retention, but their proposals will need to be tweaked to fit the requirements of the bill."
The market also must contend with the fallout from the Dodd-Frank Wall Street Consumer Protection Act's repeal of Rule 436(g) of the Securities Act of 1933, which exposes rating agencies to potential liability under Section 11 of the Securities Act of 1933.
As a result, Moody's Investor Service, Standard & Poor's, Fitch Ratings, and DBRS have withdrawn their consent to publish their ratings in public ABS offering documents. (See related story on p. 6)
The SEC issued a no-action letter granting a six-month transition period during which ratings will not be required in these documents, although Barclays analysts said that the language in that statement suggests that the SEC fully intends to enforce the repeal of Rule 436(g) as it is written in the Dodd-Frank bill.
The grace period granted by the regulator, Barclays said, is a courtesy extended to the industry to allow it time to adapt to the new law.
"Public ABS issuance has fallen as a percentage of overall volume in 2010 and could decline further upon expiry of the SEC's no-action letter if rating agencies are unable to adjust to, or mitigate, their new liability exposures," Barclays analysts explained. "We think the onus will be on the industry to find a solution that keeps public securitization markets open while maintaining Congress's aim of holding rating agencies accountable for their ratings."
