After a daunting few years, securitization re-asserted its position as an important component of
the global capital markets last year, with new deals coming to market faster and in greater numbers than at any time since 2008. With 2013 now underway, the upward trajectory may be sharper and global investors are certainly taking note.
Importantly, overseas issuers are taking advantage of strong U.S. investor appetite by increasing the number of transactions that they issue into the United States. For example, in 2012 we saw the majority of Canadian covered bonds issued in US dollars. In another sign of increased U.S. investor demand, Santander offered the first U.K. auto transaction issued in US dollars. We expect this trend to continue in 2013.
Interestingly, it is not just U.S. investors that are looking for opportunities beyond their borders. A number of product types have proven to be attractive from a credit and pricing standpoint to international investors. Product types like UK, Dutch and Australian RMBS, global covered bonds and U.S. CLOs are increasingly being offered into the global investor marketplace.
The securitization investor class of 2013 is likely to be the most geographically diverse group since before the onset of the financial crisis. Investors no longer feel limited to their own country for securitization investment opportunities. Instead, they are becoming increasingly comfortable with the risks and rewards of investing in and owning a global book.
As a result, rating agencies and other market participants will need to be versed in the characteristics of transactions in a number of jurisdictions in order to be able to serve investors’ needs.
Canadian Covered Bonds and Credit Cards Go South
Canadian banks issued approximately $17 billion worth of covered bonds in 2012, 99% of which were denominated in U.S. dollars. Volume in the United States would likely have been even greater if the introduction of covered bond legislation as part of the federal budget in Canada in March had not put a moratorium on issuance out of programs collateralized by insured mortgages, which are no longer eligible for inclusion in cover pools under the new framework.
Although most issuers were sidelined by the legislative prohibition, Royal Bank of Canada (RBC), the only bank whose program does not utilize insured assets, made history with its launch of the first SEC-registered covered bond. The $2.5 billion issue was several times oversubscribed, attracting a broader range of investors than the privately placed covered bonds typically issued by foreign institutions into the United States.
Public issuance offers investors index eligibility and improved price transparency via TRACE and the potential for greater liquidity. Heading into 2013, the market is expected to be quiet as Canadian banks work to set up new programs under the legislation following the finalization of the registration process by the Canada Mortgage and Housing Corporation (CMHC).
Given their past success, issuers are likely to be eager to access the market again as soon as possible. However, the shift from the use of insured to uninsured assets and the subsequent effect on pricing means that issuers will have to weigh the economics of covered bond issuance against other sources of funding such as deposits and senior unsecured debt.
Separately, Canadian credit card ABS issuers are also taking advantage of the interest from U.S. investors. Fitch recently rated a US$1 billion securitization issued by Canadian Bank of Commerce’s (CIBC) Cards Trust II master trust backed by Canadian-dollar-denominated credit card collateral.
In addition to CIBC, RBC and Bank of Montreal (BMO) also issued Canadian credit card backed notes into the U.S. market during the fourth quarter of 2012. Given the strong collateral performance and structural protections along with widespread acceptance and demand for the core consumer asset classes, Fitch expects these issuers to remain active in the U.S. markets in 2013.
U.S. CLO Investors Everywhere
Another sector likely to see more significant New deals surged during the latter half of last year, with total issuance exceeding $50 billion. Early estimates for 2013 have CLO issuance exceeding $60 billion on the back of global demand across all parts of the CLO capital structure.
A significant portion of demand for senior U.S. CLO debt is coming from U.S. insurance companies, pension funds and banks in both the United States and in Japan. Fitch’s recent investor visits in Asia have highlighted the need for new tools to help increase transparency and comparability in the CLO sector. As the CLO market continues to attract new investors interested in the product, Fitch expects to provide new products and services to help these investors better understand and compare their investment options.
Dutch and U.K.RMBS, along with European ABS, Attract Global Demand
The Netherlands overtook the United Kingdom as the largest issuing country of European RMBS by volume last year with an aggregate €41 billion versus €33.4 billion for the United Kingdom, which still leads the field though by number with 25 deals (compared to 15 from the Netherlands).
Nearly all of the U.K. issuance was placed with investors, compared with 57% for the Netherlands; the remainder was retained or placed with the central bank as collateral for funding. Roughly 35% of all non-retained U.K. RMBS issuance has been placed with U.S. investors, similar to the levels of the last three years.
As noted above, 2012 saw the first Dutch deal placed in the United States. Both U.K. and Dutch RMBS volumes are expected to remain muted in 2013 but the trend of U.S. placement is expected to continue.
The other sector of EMEA structured finance which sees predominantly placed – as opposed to ECB repo - issuance is the ABS sector, comprising mainly auto and credit card paper. A total of 66 transactions with an aggregate of €43.17 billion were issued in 2012, 62% of this placed with investors.
ABS deals are typically smaller than RMBS and are generally absorbed by European investors, but Santander paved the way for U.S. placement with its U.K. auto deal in October. We expect to see more.
Australian RMBS, ABS and Covered Bonds Leave the Continent
Last year will be seen as the year of the covered bond for Australia. The country passed covered bond legislation in November 2011 and by the close of 2012 Australia’s five covered bond issuers had issued some AUD44 billion (USD46.2 billion) in covered bonds in seven different currencies with USD (29%), Euro (29%) and AUD (28%) dominating. The Australian dollar investors were unexpected, however many of these investors were discovered to be offshore accounts with AUD funding capability.
While traditional Australian ABS/RMBS issuance was dwarfed by the emergence of covered bonds, Australian RMBS and ABS have also seen significant global investor interest in the past 12 months with significant momentum building towards the end of 2012. The good credit story, higher offered yield compared to similar products in other global centers, and the diversification offered by Australian product have seen a return of interest from European, U.S. and Asian (particularly Japanese) investors who had largely been absent since 2007.
The currency swap costs have been a significant deterrent to Australian issuers issuing in currencies other than Australian dollars; however as with covered bonds, issuance in foreign currencies including USD, GDP and JPY was seen in 2012, and offshore investors are increasingly being seen in AUD product.
Fitch expects the global interest to continue into 2013 as global investors search for yield. As investor acceptance and demand widen, Fitch expects to see more global securitization and covered bond issuers accessing international markets.
Kevin Duignan is the global head of structured finance and covered bonds at Fitch Ratings; Marjan Van Der Weijden is head of EMEA structured finance for Fitch Ratings.