As deal flow has fallen silent in the subprime mortgage and CDO markets, forecasts that ABS is in its death throes have grown louder and more confident.
The logic isn't far-fetched; after all, over the past few years players breathlessly built up these areas into the most potent engines of securitization growth. They get switched off and the entire securitization machine sputters into stagnancy, right?
Wachovia Securities analysts aptly put it in their recent research: "It is likely that what we are witnessing is a return to a securitization as a funding source rather than an arbitrage vehicle," the authors wrote. "Those predicting the demise of structured products could not be more wrong, in our opinion."
But not all products will survive. ABS CDOs, for instance, look marked for the grave. The CDO machinery that Drexel debuted as a way of aggregating illiquid collateral from the private placement and middle market sectors is, for sure, a thing of the past.
Even the CLO market reflects this flight from arbitrage deals. "Despite the fact that there was some very modest CLO activity for the first half of this year, it does not represent a return to the old model," said Randy Schwimmer, senior managing director at Churchill Financial. "Rather, it's an attempt to create a working CLO structure in the face of lower leverage and significantly higher liability costs."
Schwimmer added that a number of well-heeled funds are becoming more creative in providing capital to issuers who need it in the absence of traditional leveraged loan liquidity.
The now moribund CDO market and even RMBS tell stories that are worlds apart from what's happening in consumer ABS, where, for the most part, investor appetite is still healthy, despite bearish events.
Factoring out residential ABS, new issue volume in the first half of 2008 was actually 80% of last year's figure, according to Wachovia.
Analysts predicted that with the artificial demand from CDOs gone, the ABS issuance would probably revert back to 2003 levels by 2009. That's when consumer ABS volume was roughly $350 - $400 billion. And RMBS, they said, won't completely be out of the picture, generating roughly $150 billion in issuance.
All things considered, most deals in the consumer ABS arena have been oversubscribed. Apparently, at least in this area, concerns about the macroeconomic picture and the subprime fallout have not impaired demand for new issue consumer paper. The blip is more on the issuer side, where it has become less economical to come to market with deals.
There's no denying that consumer ABS volume did drop compared with last year. According to the Deutsche Bank Securities Securitization Monthly report for July, it's only the credit card sector that didn't experience a notable decrease in supply from 2007's level. Year-to-date issuance for credit cards stands at $47 billion - flat to the comparable figure for 2007. Auto volume was pegged at 26% below the same period last year and student loans at 38% below.
But this downward trend needs to be seen in light of dismal indicators. The U.S. unemployment rate remained at 5.5% in June, a level not seen since October 2004; the June Consumer Confidence report was worse than expected, dipping to 50.4 from 58.1; and revolving credit increased only 4% in April 2008, much slower than last year's monthly average of 7.4%.
Indeed, issuance in the ABS market certainly isn't what it used to be, but it's not a death sentence either. Securitization is still a key funding source for many companies, especially in the consumer business. ASR has been chronicling this all along, with a steady pace of issuance showing that not all ABS sectors are created equal.
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