Two and a half years after the global financial markets imploded, the dust has begun to settle, providing a clearer view on which sectors of the securitization market will thrive-and which won't.
Unlike many competitors who drastically downsized their ABS teams and even eliminated coverage of some sectors, Goldman Sachs has remained active across its existing businesses.
"We haven't re-launched any [ABS] businesses because we never de-launched any," said Michael Millette, who recently became the sole head of the firm's ABS banking group after his former co-head, Kevin Gasvoda, moved to another role in the mortgage group.
Maintaining "skin in the game" has benefited Goldman in terms of capturing business, such as a $1.4 billion CMBS deal it issued in mid-March and sold in the 144A market along with co-lead Citigroup Global Markets. It's also given Goldman bankers a well-rounded view on which sectors are hot and which are not, and may never be again.
The CMBS market is one of the strong performers. Millette noted that the first post-financial crisis deal was completed in late 2009, nearly $20 billion in CMBS was issued in 2010, and by the first quarter this year $8.2 billion had already been sold. "Investors have returned to the market at spreads that support the origination of the loans," Millette said.
The auto ABS sector, including securitizations of leases and floor plans, has perhaps been the strongest performer. It thinned out for a few months during the height of the crisis, but otherwise providing investors with a steady stream of securities. "That market has emerged from the crisis validated; if anything, the crisis improved the reputation of the sector," said Millette, adding that auto deals' structures withstood the bankruptcies of Chrysler and General Motors.
"The sector's volume level is below pre-crisis levels, but that's because the number of cars sold remains lower," Millette said.
The transportation-related ABS market shut its doors November 2007 through 2009, but activity is bubbling across all the transportation sectors, said Millette, pointing to aircraft lease financing as an example. No aircraft lease deals have been completed in the structured market, but plenty have in the leveraged finance market, which rallied strongly in 2010 and provided an alternative financing venue.
"We think we'll see structured lease deals as we move through 2011" and the structured market continues to recover and becomes more competitive, Millette said.
Interestingly, some markets without such financing alternatives have recovered sooner. CMBS is one example, although as Millette noted, "Commercial real estate needed to be financed and refinanced-issuers and investors came back together in this market to get that done. There was not a ready alternative."
Millette said that whole-business securitizations have been possible for more than a year now, and a handful of deals have been completed, like the recent $40 million securitization for NuCO2 and the $245 million securitization for Cajun Global, which owns and franchises restaurants under the Texas Chicken and Church's Chicken brands. He noted, however, that structured finance is a labor-intensive market, which requires creating the legal structures and issuance vehicles and completing detailed documentation.
"For issuers to use these markets, they want to see pricing efficiency and higher proceeds levels," Millette said."We're just getting there in the whole-business securitization sector."
Millette pointed to insurance-linked securities, including catastrophe bonds, as another success story. "We expect this year's issuance to be the highest since Katrina and perhaps the highest ever," Millette said, noting that the forecast was made before the disasters in Japan.
Some securitization sectors have been less fortunate. The student loan ABS market is unlikely ever to return to its volume highs, given the expansion of the federal government's direct lending program last year. Millette said the same is probably true for credit cards, for which securitization has become an alternative form of financing after new account standards required bringing those assets on balance sheet.
"We may see some banks accessing the ABS market to preserve expertise in that channel, and we may see some non-banks," Millette said. "Volumes will be much lower, though there will be continuing legacy asset securitization in both sectors."
Perhaps the biggest question mark remains over the RMBS market, which during its heyday was by far the largest component of the securitization market. Non-agency RMBS has been limited to a handful of public and private deals, including Redwood Trust's recent $280 million public deal last month.
Millette said the key issue impeding non-agency RMBS issuance resembles that in the aircraft and whole-business sectors - pricing and execution in securitization markets versus alternatives.In this case, the alternative financing comes from Fannie Mae and Freddie Mac rather than the leveraged finance market.
Changes will likely depend on how those now government-owned lending organizations are reformed and other rulemaking. Last week's regulatory proposal for lenders to retain 5% of RMBS unless borrowers pony up 20% down payments and have high credit scores is certain to have an impact.
Whatever the outcome of the regulatory proposal, certain fundamentals must be met before the traditional RMBS market revives. "Either the RMBS market will rally to match Fannie and Freddie's terms, or Fannie and Freddie will change their terms-it's likely there will be some of both," Millette said.
However, Millette said, the RMBS market appears to be in the process of reinventing itself. He pointed to Congress's current legislation that would permit covered bonds, a common structure in Europe in which the assets remain on the issuers books. He also noted Freddie Mac's structured passthrough certificates or K Certificates, which apply the government guarantee to senior portions but not to the junior ones.
"The junior portions would be brought to investors who evaluate the credit risk," Millette said. "I think RMBS is going through a period of pilot programs and reinvention, and I'm not sure if the old machine is going to get started again."