In the last few years private asset-backed transactions have become a rare animal, thanks in part to a commercial paper market attracting issuance that in the past would have gone the term route. But now forces are gathering - both economic and regulatory - that may presage an increase in private ABS issuance.
For starters, banks, frequent conduit program sponsors, have been stung by a few bad loans in their ABCP conduits and have begun tightening up on what goes into those conduits. Generally, sponsors are offering less favorable rates than in the past, while at the same time low interest rates are making the term market increasingly attractive.
In addition to these factors, the Financial Accounting Standards Board's consolidation project exposure draft has at least threatened to have a significant impact the economics of certain ABCP conduits for both the sponsors and the sellers. Regardless of the guidelines final form, transactions have slowed for the conduit market because of the general uncertainty.
Jewelle Bickford, senior managing director at Rothschild Inc., said she is receiving about one unsolicited call a week inquiring about issuing a private term deal - a level of interest that did not exist a year ago. "We definitely think activity is picking up in the term market. Our pipeline is pretty full."
She noted that her firm will be bringing five private deals between now and September, including two leveraged fund-of-funds deals and three lease transactions. Besides its regular clients, including the fourteenth securitization for MicroFinancial, Rothschild's five deals will include two new clients that turned their backs on the ABCP market. "They were unhappy with the pricing with the banks' CP vehicles, so they thought they might as well do a term deal and lock in the low rates," Bickford said.
The year-over-year nominal growth of the ABCP market has been easing since late 2000, but issuance has become dramatically less robust over the past six months. In December of 2001, the year-over-year growth was 16.1%, or $103 billion. But in May of 2002, the year-over-year growth had been cut almost in half, to 8.6%, or $56.6 billion.
However, if it's true that private ABS issuance is picking up, the trend must be in its very initial stages. Traditional private ABS issuance, which was $10.2 billion in 1999, dropped to $2.4 billion in 2000 and $3.6 billion last year. One investor said: "We haven't seen anything; it's been dead for a long time."
Indeed, Jay Eisbruck, an senior vice president at Moody's Investors Service, said private ABS issuance has been so slow for so long that if issuance does pick up there will need to be a re-education of the investor base, at least to a degree, given that so many private deals are one-off story transactions.
Nevertheless, he said, should the ABCP market become less accessible, the term market clearly stands to benefit. "If you've got your securities program in place, going to the term might be the most logical thing to do. I wouldn't be surprised," Eisbruck said.
Bickford disagreed that the investor base will need to be re-educated should issuance pick up. And she added that the dearth of private product has made investors "much more reasonable about spreads. It's an issuer's market," she said.