Low interest rates and economic uncertainty in the first six months of the year have led the U.S. ABS market to a record-setting pace for new issuance, though analysts foresee issuance dropping off slightly in the second half of the year.
In the first half, total public supply topped $170 billion, according to Thomson Financial, but following a record-setting first quarter issuance has slowed of late and will likely lag the pace set through June.
Most of the supply so far has been focused in the auto-loan (up 37%), credit card (up 74%) and home-equity loan (up 48%) sectors but there has been a sharp increase in stranded-cost and foreign RMBS. Stranded-cost issuance totaled $7.197 billion, up from $998 million in 2000, and the increase in Australian RMBS volume is approaching $4 billion, according to Salomon Smith Barney.
These increases have more than offset decreases seen in some of the second-tier asset classes, namely the student-loan and manufactured housing sectors. Student-loan volume of $6.67 billion so far this year is less than half of the $14.305 billion seen at this time last year and manufactured housing issuance at $2.56 billion is slightly more than one-third of the $6.68 billion seen through June 2000.
Within these sectors issuance has been focused on the big players in the market, said Salomon Smith Barney analyst Peter DiMartino. "Citibank was the largest card issuer, selling $8.6 billion of credit card securities. First USA returned to the market after a one-year hiatus, pricing $3.8 billion of supply," he noted.
Dimartino also points to the auto-loan sector, with GMAC, Ford, Toyota, Mitsubishi, WFS Financial, AmeriCredit and Nissan having tapped the market already.
A combination of factors coming together at the right time, such as lower yields facing issuers and investor credit quality concerns, had both teams pushing the ball up the floor for a high-scoring first half of the year. Cynthia Ranzilla, head of securitization for GMAC, noted the low absolute yields combined with wider corporate underwritten spreads which convinced some issuers to increase their presence in securitization markets.
Additionally, issuers are increasingly acting opportunistically in the primary market, offering structures tailored to investor demand. As an example, Ranzilla noted GMAC's first offering of 2001, featuring fixed-rate paper at the short end with floaters further out on the yield curve.
"Yield curve dynamics had investor demand in floaters out on the curve and when there's liquidity somewhere, you write paper to suit demand," Ranzilla added.
At the start of the year, three leading ABS research analysts estimated total supply would finish in the $220 billion to $320 billion range and while one has since increased his target, two are sticking to their guns.
Salomon Smith Barney analyst Peter DiMartino aimed the highest, predicting $320 billion in supply. Merrill Lynch's Daniel Castro and Barclays Capital analyst Jeff Salmon were at $220 billion and $230 billion, respectively. Merrill's Castro has since raised estimates to $240 billion.
Each of the analysts are holding to their current estimates, with varying degrees of fall-off seen in the coming months. Merrill's Castro estimates that during the summer months immediately ahead issuance will slow significantly before a fall surge, only to drop off late in the fourth quarter.
"Unlike in corporate debt markets, where issuers can increase borrowing to take advantage of lower yields, with asset-backeds, for the most part, issuers can't. With the exception of the large issuers, GMAC or Citibank for example, there is only so much to securitize."
Following the increase in supply, particularly in the auto and card sectors, spreads look to widen going forward, with relative value seen in longer-dated home-equity and off-the-run product.
"Auto spreads tightened throughout the first half and can't get much tighter, while credit card spreads have resembled a dead man's cardiograph - flat. The only direction they have to move is out," Salmon added.