Despite the robust public ABS market, or perhaps in part because of it, true private asset-backed securities have been scarce, with volume steadily declining for the third straight year.
The market peaked in 1998 at just under $13 billion in issuance, dropping to $10 billion in 1999 and $2.5 billion last year, according to Thomson Financial. Currently, there has been less than $500 million in privately placed ABS year-to-date.
However, according to industry pros, asset-backed commercial paper conduits have picked up some of the assets that would have gone to term two or three years back, often due to better pricing.
"The pricing is typically only better in conduits if you do not reflect for the lower advance rate," said Warren Kornfeld, director of asset-backed finance at William Blair & Co. "If you do reflect the lower advance rate, typically the pricing on a term deal will be superior on the term securitization."
But pricing is only part of the story. According to an investment banker in this industry, insurance companies and other asset managers have not only tightened up on credit (which explains the pricing), but they are demanding more and more in the way of due diligence from the issuers.
"These companies have really been overwhelmed by the due diligence, the information requests, the documentation, control issues, negotiation and other complications," the investment banker said. "Conduits are more user friendly."
Beyond conduits, issuers that are able to have moved into the growing 144A market, which is viewed as quasi-public, and doesn't offer the liquidity premium of the traditional market.
ABCP, smoother execution, less advance
Even at its peak, the increase in conduit-placed deals would be almost imperceptible inside the $660 billion ABCP market, according to Sam Pilcer, who runs the ABCP group at Moody's Investors Service.
One reason conduit sales tend to be simpler is that it only takes one of them to do a deal, as opposed to the several investors that would partake in a term transaction.
This is especially conducive for first-time issuers, where only one investor needs to be educated on the company or the asset. Just a few years back, the testing ground was the private term market.
As stated above, the biggest disadvantage of conduits is the lower advance rate. "The term market will allow for a higher advance rate," Korneld said. "The reason is that almost every conduit out there requires a transaction to be underwritten to a single-A level. There's definitely a term market out there for triple-B and double-B rated tranches."
Also, conduits tend to require finance companies to have a minimum of $10 million or $15 million in equity or subordinated debt capital, whereas insurance companies are a bit more flexible.
In addition to the CP market, some former private ABS issuers have chosen "mini-securitizations," or non-special purpose entity (SPE) portfolio sales to non-traditional intermediaries, such as banks, instead of accessing the traditional private market.
Diversity Capital, for example, which was established early last spring as an asset-backed financing boutique targeting the private market, has found a lucrative niche just underneath true bankruptcy-remote ABS, arranging portfolio financings and sales. The firm has closed roughly 15 deals since last May.
These transactions, backed by portfolios of commercial leases and loans, range from $2 million to $25 million in size. Diversity structures the unrated, non-SPE transactions to what it believes is a minimum investment-grade risk, and places them with private intermediaries, oftentimes banks.
The transactions are similar to whole loan sales, only the originators, who are often emerging companies looking to ramp up their businesses, are retaining the servicing.
Significantly, many of Diversity's issuers are the same issuers who were structuring larger true ABS transactions in the past, in the $50 million realm.
"In a lot of cases, they just don't want to go through the cost and expense of doing a [true ABS] deal, so they'll do a series of smaller deals with us," said David D'Antonio, co-founder and managing director at Diversity. "This way they don't have to eat up all their lines, and worry about getting execution, and being held hostage by the market."
On the true ABS front, Diversity brought two first-time issuers to the conduit market, one worth $75 million and one worth $50 million.
Interestingly, because of demand from a few conduits, which are interested in these one-off type financings that offer more yield, Diversity will be structuring the SPEs with true-sale opinions for some of its portfolio-sale clients.
"We're working with conduits who are interested in buying these $10 million, $15 million pools," he said. "They know what the private investors are getting for these deals."