As the clock winds down on a hulking year for ABS, the eyes of analysts and bankers are turning toward 2005, and expectations are mixed. As market participants make their calls for the New Year, the one asset class that has garnered the most varied predictions has been the student loan sector.
Peter DiMartino, ABS strategist with RBS Greenwich Capital, sees student loans as the class with the greatest growth potential and forecasts issuance will grow by 20% to around $60 billion next year. "2005 will be an unusual year for student loan ABS. Never before has the sector expanded while its largest issuer, Sallie Mae, reduced its issuance volume from the prior year. It could happen in 2005," said DiMartino. A significant portion of the sector's increase will stem from the private student loan market, he added.
DiMartino is not alone in viewing student loans as the home run for 2005. According to Jeff Salmon, head of U.S. ABS research for Barclays Capital, rising tuition costs and an increasing number of college-bound students will fuel government-guaranteed and private student loan growth, helping the sector to reach $60 billion in new issuance.
JPMorgan, on the other hand, expects student loan ABS volume to be essentially flat, finishing off the year at around $40 billion in issuance. Lehman Brothers and Merrill Lynch are even more pessimistic about student loans, calling for a 15% decline to $35 billion. "Look for Federal Family Education Loan Program issuance to decline in 2005 as one of the key growth factors, Sallie Mae, cuts back issuance," write Lehman analysts. Lehman also predicts that private student loan ABS will make up a growing portion of overall student loan securitizations next year, but that still will not be enough to push volume past 2004 levels.
Fitch Ratings writes that asset performance of the student loan sector will likely remain stable in 2005, and sees room for upgrades for outstanding deals in the first half of the year. According to its 2005 outlook report, Fitch is watching the reauthorization of the Higher Education Act for keys that will affect the student loan market next year. The main issues are increasing loan limits and expanding grant programs, changing the interest rate on consolidation loans from fixed to floating and elimination of the single-holder rule, which would be a boon to consolidation loan marketing companies.
In home equities, RBS predicts issuance will outpace 2004 by 15% coming in at a whopping $470 billion. JPMorgan sees home equities as the greatest growth sector, but is slightly less optimistic than RBS, calling for $375 billion. "Fears of a housing bubble are overblown in our opinion. Considering evidence of still-strong economic data from the housing sector and growing demand for housing," writes JPMorgan's ABS team. JP Morgan goes on to point out that relative value in home equities versus other fixed-income products remains attractive at all levels of the capital structure.
Fitch expects asset performance in the prime auto loan sector to remain stable, and says to watch longer-term loans, increasing loan to value ratios and other competitive net pricing strategies that could lead to changes in underwriting and performance, particularly as it relates to loss severity. Although the subprime auto sector is also exhibiting signs of improvement, Fitch remains guarded in its performance outlook. Despite encouraging year-over-year comparisons, monthly volatility still persists in Fitch's subprime delinquency index, and could be a harbinger of future losses.
Barclays predicts no growth in autos.
Michael Kanef, managing director of the asset finance group for Moody's Investors Service, expects credit cards to outpace 2004 issuance. Large bank mergers in 2004 caused reduced volume, said Kanef. "That volume will come back in 2005," he added. Fitch likewise expects credit card issuance to rise to "more normal" levels next year after a sluggish 2004.
Analysts are forecasting manufactured housing to be the laggard among the ABS class of 2005 seems unanimously to be manufactured housing. "...MH issuers did not return in any significant fashion this year with recovery in that industry taking longer than anticipated and very few active lenders securitizing assets. This sector is so dead, we are not even bothering to project volume for 2005," wrote JPMorgan. Barclays stands alone in its relatively high prediction of $2 billion, while Merrill Lynch forecasts a paltry $500 million.
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