Expect less anxiety about impending regulations and more talk about deteriorating credit quality when securitization market participants convene in Miami next week.
That’s not the say that regulations are only an afterthought of the agenda — there’s still a good number of panels at Information Management Network’s ABS East gathering on Sept. 16-18 that will directly or indirectly deal with them.
It’s just that regulations won’t dominate the conversation to the same extent they have in recent years, when there was much more uncertainty surrounding risk retention rules and Reg AB II, affecting disclosure and registration for securitization issuers.
“It doesn’t feel like the sword hanging over everyone’s head,” said Kevin Duignan, managing director at Fitch Ratings.
As the implementation date for Reg AB II approaches — November 2015 for most rules, November 2016 for asset-level disclosure — ABS players are parsing pilot program filings to see how to comply, said Jason Kravitt, a partner at Mayer Brown.
Other regulations from the SEC, on 144a deals for instance, may cause more concern but Kravitt said he “didn’t think people are worried that they can’t figure out a way to deal with them.”
As the trough of the interest rate cycle comes to end, the conference will play host to more talk of how resilient the underlying credits — often consumers — are in securitizations.
Auto Loans: End of Halcyon Days?
In auto loans, for instance, “the best of performance is behind us,” said Hylton Heard, senior director at Fitch. Heard pointed out that in securitized prime auto loans, annualized losses were at 0.42% in July, which is still below the 0.71% averaged since the beginning of 2009.
In the subprime sector, losses are rising at a quicker rate, though they also remain below historic averages.
ABS East participants will no doubt be discussing the ways in which looser underwriting, longer-term loans, the prospect of falling used-vehicle prices (they’ve held up remarkably well so far), and investigations by both the SEC and the Department of Justice will impact the performance of auto loans.
CLOs: Holding the Spotlight
CLOs will also loom large this year. Indeed, collateralized loan obligations and the people who love them will play their biggest role ever at ABS East.
“It’s now a mainstay of the conference, it’s replaced RMBS,” said IMN’s Jade Friedensohn, who estimated that nearly 40% of attendants will be there for CLOs.
Friedensohn said 4,000 people are pre-registered for the conference, up about 25% from this point last year.
That’s despite the fact that CLO issuance is unlikely to match last year's record level of over $120 billion. As of Aug. 31 the tally for this year was just under $74 billion.
She added that the larger rooms than last year will host the CLO track, slotted for Thursday, the 17th.
Risk retention rules for CLOs, which take effect in 2016, won’t be stoking the same concerns they have in recent years at next week’s conference. CLO managers “have to have a credible plan in place at this point,” said Fitch MD Kevin Kendra.
And, of course, CLO devotees will be exchanging views on the continued vulnerability of commodity-based borrowers. Moody’s Investors Service pointed out last month that five of 11 offshore drilling companies under downgrade review hadloans in CLOs.
Marketplace Loans: Future Gets Cloudier Amid Fast Growth
Another, younger, asset class sure to garner a lot of attention at ABS East is that of marketplace loans, which have been bundled into securitizations. The main attraction? The sector’s explosive growth, with origination doubling every year since 2010, hitting $12 billion last year.
But there’s a threat of tighter regulations. A recent court ruling might force these lenders to conform to state-by-state interest rate caps.
Also the Federal Reserve is in reconnaissance mode with this sector, putting out an inquiry consisting of 14 questions, including the desirability of packaging these loans into bonds.
The Consumer Finance Protection Bureau might also have a thing or two to say about this sector.
A Friday panel with the CFPB — off limits to reporters, so it should (alas) be particularly revealing — will discuss the bureau’s areas of interest.
While qualified mortgages (QM), which have a legal safe harbor from ability-to-repay rules, headline that discussion, it’s bound to include other areas that spill into consumer ABS.
As Ron D’Vari, CEO of NewOak Asset Management, put it, “anytime you touch a consumer/borrower you’re going to have issues with the CFPB.”
Mortgages: QM on the Agenda
In regards to QM, conference participants will have the chance to discuss the arrival of the first pure non-QM deals. With one done from Loan Star Funds, and another in the works from Angel Oak Capital, it remains to be seen whether this sector could actually become a motor of the still-tepid private label RMBS sector.
“You’re seeing a lot more conversations about non QM mortgages,” D’Vari said, pointing out that wasn’t so much on the agenda at last year’s ABS East.
But RMBS 3.0 — the initiative to “restore confidence” to the private label RMBS market — is still a “difficult” endeavor, Kravitt said.
And talk of introducing a transaction manager —an entity in a mortgage-backed that would sit between the trustee and the servicer — hasn’t moved beyond talk. While pointing out that rating agencies have indicated they won’t give credit to a deal for a transaction manager, Fitch MD Grant Bailey said there is interest in working out this arrangement in anticipation of more lending to riskier borrowers.
FFELP: Working Thru Summer's High Drama
Finally, deals backed by FFELP loans are going to attract a lot more attention at the gathering than anyone would have expected a few months ago. Income-based repayment plans by the government are pushing out loans maturities, dramatically altering the timeframe investors had expected to get their money back. “IBR just wasn’t around when the vast majority of those deals were dated,” said Fitch MD Michael Dean. And now it’s unavoidable.