As the hunt for yield sends investors looking further down the credit curve in CMBS and RMBS land, market sources said that another good place to look might be in esoteric asset classes.
Without the monoline wrap, these asset classes could prove a good buy for the right investor. Under the umbrella of esoteric assets fall rental-car fleets, transportation, cell phones, aircraft, containers, intellectual property, timeshare loans, trade receivables and casualty insurance.
Investors can reportedly earn higher yields for these assets because they are less liquid and require extra due diligence.
According to a market source, without the monoline wrap that typically came with the deal, buyers can earn an extra 100 to 150 basis points on average, more than they would buying plain-vanilla ABS.
Standard & Poor's analysts said that an unexpected development for the market was that some of these non-traditional securitizations were priced at relatively tight spreads. This implies that the market perceives them as relatively better investments.
"Corporate and intellectual property ABS appeal to buyers because of the higher yield these assets offer compared to more traditional securitization structures," S&P analysts said. "The deals are also structured with better recovery prospects for investors than some forms of corporate debt because they include features that may serve to reduce the risk of delays and uncertainties about receiving payment under a bankruptcy filing of the servicer."
This March the U.K. whole business sector that has traditionally seen deals structured with a monoline wrap saw Wales & West Utilities (WWU) launch a new transaction. Other British utility companies will be returning to the securitization market for refinancings.
The debt will be issued under a new £5 billion ($7.41 billion) multi-currency, secured, covenant bank debt and bond issuance program near the end of the month (subject to market conditions), according to a regulatory filing.
The Wales & West Utilities' deal is a refinancing of the acquisition bank debt of WWU, the regulated gas distribution network. The bond issuance vehicle Wales & West Utilities Finance (WWUF) has already issued two series of senior bonds that will become part of the Class A debt tranche. WWUF is expected to issue new Class A bonds, and Class B bonds as part of the refinancing transaction.
Moody's Investors Service said the eight main U.K. water companies need about £10 billion in new and refinanced funding between 2010 and 2015. Anglian needs £1.4 billion to £1.8 billion; Northumbrian £500 million to £600 million; Severn Trent £950 million to £1.05 billion; Southern £750 million to £850 million; Thames £3.8 billion; United Utilities £1.6 billion; Wessex £550 million to £650 million; and Welsh Water £550 million to £650 million.
In addition, the financing of a loan behind the sale of EDF Energy Networks could well be refinanced through a WBS. In November, EDF put in place a £950 million bond on the asset, which can be flipped into a WBS within 18 months.
According to a Bloomberg report, Australian utility and infrastructure companies may also refinance $13 billion of debt this year without the bond insurance provided by monolines. Envestra and ElectraNet as well as five other firms raised $2.3 billion from bonds this year, up from $140 million in 2009, according to data compiled by Bloomberg.
Airports, utilities and infrastructure-related issuers have $15 billion of debt due by the end of 2011, according to Moody's, while S&P said utilities must refinance a third of their outstanding debt next year.
S&P analysts said that corporate and intellectual property securitization will also continue to be an option for companies with stable cash flows.
But without bond insurance, issuers need to consider various approaches to address the credit concerns of investors, including providing for backup servicers and sophisticated controlling parties to direct the operation of the transaction in the event of a servicer bankruptcy.
"In our view, the loss of monoline insurance in future deals may be more of a concern for investors who focus on highly rated investment grade securities and rely on the rating elevation the wraps provided," S&P said in a special report. "Hedge fund managers and other speculative grade investors seeking higher yields may actually view the removal of bond insurance as creating new investment opportunities. For these investors, who may always have been more focused on the fundamental credit quality of the assets, the removal of the bond insurer may make future deals more attractive depending on their perceived risk adjusted returns."