With the rated securitization market staging a comeback and bank financing more readily available, investors in ABS placed in the traditional private market are increasingly confined to smaller deals backed by more esoteric assets.
Traditional private ABS deals have by no means been squeezed out, according to Fouad Onbargi, head of investment banking and ABS origination at KGS-Alpha Capital Markets.
However, larger deals whose issuers have more capital-markets experience are often finding homes in the more liquid bank and Rule 144A financing markets.
"Issuers who once would have accessed the pure private market in 2009 and 2010 now have more alternatives," Onbargi said.
As a result, he said, the private market is migrating to smaller deals that often are securitizing "off-the-run," less common asset classes. Those assets range from music library receivables to delinquent tax returns to truck leases.
Richard d'Albert, co-chief investment officer at Seer Capital Management, agreed, noting that over the last year these deals have tended "to be more credit-intensive, or from less well-known issuers."
Onbargi said his firm is in the process of brokering an approximately $50 million deal for a specialty finance company that's expected to be purchased by a single investor. The issuer is securitizing what is essentially a new asset class that doesn't have a fixed rating methodology in place. "Although [the issuer] saw the kinds of rates it could get in the 144A market, it did not want to go through the rating agency process and preferred a negotiated private deal," he said.
That process for a new asset class can take six to eight months. With the financial crisis in hindsight and an array of problematic possibilities today, topped by the European debt crisis that could throw the global financial system into a tailspin, issuers may be willing to pay the extra spread on a private deal in order to bring it to market quickly and hopefully retain access during periods of market stress.
"If you have a good long-term relationship with your institutional investor base [in private transactions], over the long run you hope that will be more stable than the public market at any point in time," noted Roger Gebhart, chief financial officer of Commercial Credit Group (CCG), a commercial finance and leasing company that began operations in 2004.
Gebhart said those investors are likely to be more willing to provide financing in periods of financial market stress, since they're "not just buying a weighted average life, final maturity and asset class," but also have a better understanding of the company's specific strengths and weaknesses. In addition, depending on market conditions, Gebhart added, the private market can act as a stepping stone to a 144A or public deal.
"Over time you build your investor base, gain experience and more transaction history, and that all goes to provide a better foundation for a public deal in the long-run," Gebhart said. He added that CCG anticipates taking that step at some point, conditions permitting.
CCG closed a $105 million privately placed ABS deal in late February that was distributed to a broad group of institutional investors. Wells Fargo Securities, which structured the deal and acted as placement agent, did not respond to inquiries.
Onbargi said many companies that previously had only access to financing placed privately under Regulation D, which governs the limited offer and sale of unregistered securities under the Securities Act of 1933, now have alternative sources through banks and the 144A market.
This dynamic may have tipped negotiations on deal terms in issuers' favor. Onbargi noted that, in order to receive the most attractive pricing, issuers of privately placed debt typically have sought to replicate as closely as possible the pricing and credit metrics of 144A transactions.
While that dynamic holds true today, the goal lines have shifted. For example, where investors in the private market may have wanted a 15% return a few years ago and the issuer was willing to pay 12.5%, now investors may accept the lower number but issuers have widened the bid/ask spread and want to pay just 9%.
D'Albert said credit spreads in the private market have dropped between 200 and 300 basis points over the last year or so, in part because banks have become more aggressive lenders, putting them in competition with ABS investors. However, banks still remain somewhat constrained in terms of capital and the risk their credit committees will approve.
The wider bid/ask makes it harder to get traditional privates done, and it illustrates how issuers now hold the upper hand at the negotiating table. These issuers have more access to the bank and 144A markets, which offer more competitive terms. Because of this, investors might have become more willing to accept a lower yield to keep the issuers from taking deals to these more liquid markets.
In another sign of growing competition to finance deals, d'Albert said, banks are syndicating a portion, say 10%, of the warehouse lines they provide to customers, enabling them to advance more of the credit line clients use to originate loans than they could otherwise. Those warehouse lines are typically "termed out" later on with ABS, usually bonds issued in the 144A or public markets.
"As a result of the market becoming more competitive, banks have to provide a higher advance rate, and at times there may be a gap they can't fill on their own," d'Albert said.
Onbargi said that to a certain extent all credit markets move in one direction, so if terms for banking financing and rated bonds are loosening somewhat, the private market will follow suit. "I think private-placement investors are more likely to move on price than credit terms, however," he said.
CCG would appear to be a candidate for potentially issuing in the 144A market, given the size of its most recent deal, the second in two years. That may have been a factor prompting investors to provide more attractive pricing.
"CCG did see an overall lower coupon when comparing 2012 to 2011," Gebhart said. "However, it is very difficult to quantify whether that was due to a lower overall interest-rate environment or an improvement in spread requirements from investors."
