JPMorgan: Net ABS Supply to Reach Positive Territory in 2013
JPMorgan Securities analysts anticipate the ABS market next year to finally have positive net supply, meaning new issuance minus maturities. The expected growth will be driven by rising auto and credit card supply, analysts said in a report released today.
This comes after a cumulative decrease of roughly $250 billion in outstandings in five straight years of contractions, including a dip of about $15 billion in 2012, analysts said.
They are expecting gains in the auto at $15 billion and credit card at $5 to $10 billion ABS sectors to be partly offset by continued drops in student loan (dipping by $5 billion) and other asset classes (decreasing by $10 billiion).
Inspite of the probable small increases, volumes in these two ABS sectors are far off their peaks. Auto supply stands at $137 billion versus $197 billion in 2006 and credit card ABS at $160 billion as opposed to $325 billion in 2007, analysts reported.
They think that demand will stay higher versus the supply available in 2013 in ABS and across securitized products, specifically because of QE3. That, together with low rates, will keep investors hungry for credit products, particularly those that provide incremental spread pickup, they said.
The firm's gross ABS supply forecast for 2013 is $205 billion to $215 billion, with the increase from the auto and credit card segments. Analysts anticipate auto ABS supply to reach $95 billion to $100 billion next year compared with $81 billion year-to-date. This is consistent with auto sales expected to rise in 2013 to more than the 15 million unit seasonally adjusted annual rate, along with greater consumer demand for these loans.
Additionally, JMorgan analysts said that auto lenders have more actively sought funding via ABS. For instance, the number of subprime auto ABS shelves has approximately doubled this year compared to two years ago, they said.
In terms of prime collateral, they have also seen more issuers and more lease ABS programs. Analysts have also witnessed two bank issuers of prime auto ABS sell the residuals for favorable off-balance sheet accounting treatment. They expect the banks to continue pursuing this strategy as long as ABS market conditions are favorable and comparatively insulated from negative external headwinds.
In credit cards, JPMorgan's 2013 forecast calls for $45 billion to $50 billion in supply. Analysts projected about $40 billion in runoff next year, resulting in the firm's $5 bllion to $10 billion net supply projection.
In comparison, year-to-date credit card ABS supply reached $37 billion compared to about $65 billion in runoff in 2012. JPMorgan analysts project that credit card ABS cross-border activity will stay strong in 2013, with Canadian U.S.-dollar issuers offseting lower U.K. issuer participation.
Securitization also remains an attractive funding option for domestic banks looking for low-cost term funding. Analysts still think it makes sense for more issuers to reactivate some dormant master trusts, even just to maintain some ABS presence rather than for capital reasons. Also, with ABS spreads tightening, more subordinate issuance is possible. All these factors should help boost credit card ABS volume, they said.
Supply in the student loan sector should stay relatively flat next year versus 2012. Analysts expect $25 billion in 2013 versus $23 billion year-to-date. There is a pipeline of FFELP receivables from lenders‘ balance sheets and conduit funding programs to the ABS market, as well as restructuring opportunities, although next year might be the end.
Analysts also expect FFELP student loan ABS supply in 2013 to be flat to experiencing a marginal decrease from this year. They think the risk of a U.S. sovereign rating downgrade by another rating agency, aside from Standard & Poor's, will result in only a minor downside for FFELP ABS issuance since spreads have rallied significantly and transaction have had split ratings on senior tranches. On the private side, analysts anticipate very slow growth in underlying loan originations and securitization volume because the private market will be crowded out by the government‘s Federal Direct Loan Program.