Consumer finance lenders have raised their level of asset-backed market activity this year, particuarly. But Fitch Ratings does not see that presenting any "structural" changes regarding the mix of secured and unsecured funding resources for ABS issuers in credit cards and other consumer-finance sectors.
In a brief report issued Wednesday, the ratings agency concluded there is not a fundamental shift away from their primarily secured wholesale resources like consumer deposits and unsecured borrowing, despite highly elevated ABS levels this year in consumer-lending categories.
“We believe that this [ABS] trend does not yet represent a structural shift,” the report stated, “with many consumer finance-oriented financial institutions raising consumer ABS issuance opportunistically to take advantage of attractive pricing and to enhance the liquidity of their ABS programs.”
Historically, an over-reliance on ABS issuance has elevated the risk levels in an issuer's profile due to the encumbrance that securities place on assets and the uncertainty of long-term liquidity in event of economic stress. This year, no pressure is evident, such as in the credit-card sector in which companies are sharply raising their their issuance of securitizations.
According to data research site Finsight, card companies have already topped the sector’s full-year 2016 ABS volume level of $31 billion by issuing $32.5 billion in bonds across 33 separate transactions through Aug. 7. That includes the most recent deal: Discover’s sixth master trust issuance of 2017 totaling $1.3 billion in receivables-backed notes.
Citigroup and American Express have also boosted securitization deals this year. Citigroup has nearly tripled its entire 2016 ABS volume with nine deals totaling $9.8 billion. AMEX in particular has stormed back with $6.8 billion in both fixed- and floating-rate notes in five separate securitizations of card receivables this year.
AMEX was absent from the market last year, after having issued only a single $1 billion transaction in 2015 out of its American Express Credit Account Master (AMXCA) trust. AMEX’s most recent transaction in July priced with a coupon of one-month Libor plus 38 basis points for the offered AAA notes.
Fitch notes that one of the drivers in consumer-finance ABS expansion is from riding the wave of an overall increase in asset-backed issuance this year. Total U.S.-based issuance through the end of July had grown by 21% to $157 billion compared to the same period in 2016.
Fitch said another factor is BlackRock’s plan for a US consumer ABS exchange-traded fund – revealed last week in a regulatory filing. It has contributed somewhat to the rise in demand by encouraging financial companies to issue securitizations for revolving credit card accounts or fixed-term auto, personal and student loans to fill the ETF’s forthcoming portfolio, should it be approved.
Fitch has thus far taken a neutral stance on whether the higher levels of ABS is adding to credit-risk levels for issuers. If a shift from the unsecured funding sources results, it could mean negative credit consequences for non-bank issuers. Fitch "generally views overreliance on securitization funding to be a credit negative because asset encumbrance reduces financial flexibility," the report stated.
The report stated that, as of the second quarter, the funding mix of the four largest consumer banks (AMEX, Discover, Synchrony, and Ally Financial) was still heavily weighted toward deposits (62%) compared to ABS (19%) and unsecured funding (19%).
A decade ago before the financial crisis, 23% of Amex’s funding and a whopping 54% of Discover’s came from ABS issuance; “a considerably lower proportion” came from deposits, the report stated.
“The normalization of interest rates, expected in the coming years, is a potential factor that could sustain the trend if ABS issuance ultimately becomes a cheaper funding source relative to internet deposits,” the report stated. “In some cases, securitization may be positive for an issuer's credit profile if it results in diversification of funding mix, is more cost effective and better matches the issuer's asset duration.”