The U.S. ABS market spent a lot of time in 2006 absorbing major shocks, whether it was sweeping reforms for disclosure under Regulation AB, or changes to the Higher Education Act. Next year, according to several market players, the asset-backed securitization business will deliver a few punches of its own.
Student loans is one ABS sector that will see the most significant growth, according to some market players, certainly due to changes in the Higher Education Act and rising tuition costs around the country. Congress rolled back the single-holder rule for consolidated loans, allowing borrowers to shop around for the best interest rates for their loans. Also, changes to the Higher Education Act extended the PLUS program to graduate and professional students, allowing them to borrow up to the full cost of their educations.
Consequently, 2007 will continue to see increased consolidation loan volume coming from major players such as Sallie Mae and Nelnet, as well as stepped-up efforts to keep consolidated loans on their portfolios.
Also, issuers will continue to seek out new geographic markets where they can sell their debt. SLABS issuers are stepping up efforts to court Asian investors who have healthy appetites for dollar-denominated assets. European investors, in 2006, took such a keen interest in SLABS that the market there began to anchor transactions pegged off of Libor floaters. Also, Canadian investors bought in on a student loan ABS deal for the first time this year. In Asia, The Bank of China is a growing participant in SLABS deals. Market participants expect other large banks, as well as public institutional investors, to receive steady stream of solicitations from U.S. student loan ABS issuers next year.
"We have not done it ourselves [yet]," said Robert Culnane, a managing director at GCO Education Loan Funding, which sold Canadian dollar-denominated bonds to investors earlier this year. "It's highly likely that we'll go over to Asia in 2007."
In a recent report on the ABS market, JPMorgan Securities predicted that student loan securitization volume might hit $70 billion in 2007. The market will see more securitization backed by private and alternative credit loans, with only incremental increases in FFELP loan volume, owing to similarly small increases in loan volumes for that product. Although the investment bank said that consolidation loan volume would weaken, the loan extension and repeal of the single-holder rule will set off any declines.
The not-so-hot sectors
Elsewhere in the consumer ABS sectors, market observers predicted drop offs in ABS volume for the auto sector in 2006, and followed up with similar expectations for 2007. For its part, JPMorgan says issuance will go down about 5% to $75 billion for 2007. Noticeably, captive auto finance companies such as Ford Motor Credit Co. and GMAC have diversified their funding sources by raising, between them, about $20 billion in corporate debt. Such moves, interestingly, reassured the ABS market, rather than surprising them, said Joseph Astorina a director of securitization research at Barclays Capital.
"Investors tend to get worried if they start seeing finance companies rely solely on ABS," Astorina said. "They don't want a flood of paper, which would dilute the value of the paper they already hold."
Credit card issuance is expected to remain flat in 2007, with about $65 billion in new issuance, JPMorgan said. Despite the fact that consumers' revolving debt continues to grow, runoff and diminished refinancing needs for deals in master trusts will push issuance down.
While the ABS market made efforts to comply with disclosure rules under Regulation AB, many issuers circumvented the issue by opting to bring their deals forward as 144a offerings. Excluding CDOs, Alt-A and jumbo loans, Barclays Capital estimates that 19% of ABS deals were done through the 144A/private market in 2006, up from 11.5% in 2005.
"The uptick we saw was really a result of issuers biding their time and making sure they had their [disclosure compliance] systems in place," Astorina said.
While some issuers, such as Capital One in the credit card sector, provided good disclosure through its disclosure Web site, Astorina added: "some of the smaller, less frequent issuers may not want to invest the time and resources into developing Reg AB compliance systems."
Even so, frequent credit card ABS issuer MBNA, which was acquired early this year by Bank of America in a $34.2 billion deal, was said to be considering such a move.
As for how the entire ABS market will close out 2006, estimates for volume vary. Estimates from Barclays Capital fall at $872 billion, up from $830 billion in 2005. That number excludes CDOs, Alt-A and jumbo mortgage loans. With those assets included, the bank expects ABS issuance to total $1.6 trillion for 2006, compared to $1.5 trillion in 2005.
JPMorgan said the final tally for 2006 supply will be $830 billion, marking the first decline in primary issuance for the industry, despite supply growth in the student loan sector and global RMBS. The investment bank expects the market to contract again in 2007, with issuance falling as much as 7% to $755 billion.
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