Monday 1 February 2021 12:00 London/ 07.00 New York/ 20.00 Tokyo

A review of securitisation activity over the past seven days

Last week's stories
2021 STACR debut
Freddie Mac prints first CRT trade of 2021 inside guidance
Consumer SRT prepped
Santander readies full-stack ABS
Liquidity impact
Post-Brexit divergence highlighted
Mind the gap
Innovative ILS structures creating Asian capacity
NPL pipeline builds
European asset disposals intensify
Positive prospects
Secondary CRT market gains traction
SME SRT debut
Montepio inks first synthetic securitisation
Supply issues
A tale of two markets for Dutch RMBS?
US CLO rally rolls on
Current focus on mezz looks set to move down the stack
ABS at the races
Fundamental and technical factors power US ABS, led by autos
Fuelled by very healthy technicals and fundamentals, the US ABS market has entered 2021 at a gallop, led by the auto loan sector, agree ABS analysts.

Barring an unforeseen and drastic pandemic-related downturn, there is little to derail the market at the moment. Spread levels in many sectors are already at the lowest prints seen for a decade, but the market appears biased towards even narrower spreads.

As an indication of the powerful factors at work, two auto loan deals, one from DriveTime Auto Group and one from American Credit Acceptance, last week each printed at the tightest levels seen for a BBB-rated auto loan deal since the end of the financial crisis, over a decade ago. The $410m ACAR 2021-1, comprising six classes of notes, printed at swaps plus 85bp, as did the DriveTime deal.

In the space of a week, BBB-rated sub-prime auto spreads narrowed from plus 90bp to plus 70bp, the rally reflecting not only these two new issues but also even tighter secondary market prints.

Most deals that have printed since the start of year - including not only prime and sub-prime auto loan securitizations, but also student loan deals, aircraft leases and auto leases - have seen record over-subscriptions.

"Normally, if an ABS deal is described as over-subscribed it means about five times over, but in January we've seen deals ten times, 15 times, even 18 times over. These sorts of numbers are generally only seen in the corporate space," says Amy Sze, md and ABS analyst at JP Morgan in New York.

The reasons for such performances are not difficult to discern. On the one hand, the fundamentals are encouraging and much better than might have been expected a year ago. Consumer credit has held up very well largely thanks to the several layers of stimulus packages introduced by the federal government, but even commercial credit performance gives cause for encouragements as well.

"There are fundamental issues in commercial credit, especially in the travel sector, but we still see demand for product. Several lessors are well-respected and are deemed to be strong. In the credit card space, there are minimal differences between issuers in term of spreads, which is testament to how stable they are seen to be," says Theresa O'Neill, md and senior ABS strategist at Bank of America in New York.

Three year AAA-rated floating rate credit card deals currently yield around Libor plus 20bp, about 3bp narrower over the week and 10bp narrower in the last ten weeks.  Five year AAA-rated floating paper is around Libor plus 40bp.

But perhaps even more importantl,  the technical are also very strong. Treasury yields have dwindled to virtually zero in the face of a hurricane of issuance, so any product which offers spread is popular and ABS products offer more spread than their competitors. For example, three year BBB-rated FIG corporate paper yields around swaps plus 75bp while three year BBB-rated auto loan ABS yields plus 85bp.

The strength of the eight-month rally is revealed by the fact that three year BBB-rated subprime auto paper touched around swaps plus 550bp in 1Q of 2020 during the height of pandemic panic.

Moreover, while a healthy portion of ABS paper is issued in the one-year to three-year window there is often little comparable corporate paper in these maturity buckets. In addition, ABS deals incorporate structural protection that is attractive to buyers. As deals season, the senior notes pay down and this builds the credit enhancement buffer relative to the subordinated tranches.

"The losses have been mitigated by the pandemic relief so deals are paying off faster than losses are coming in," says Sze.

The auto loan sector is also particularly well-liked as the borrowers are seen as stable and car sales have been very buoyant. Investors seek short-dated cash flows that appear strong, and paper is still cheap to corporates. It is also the biggest area of the ABS market. Nonetheless, there isn't much more room for a rally in the most highly rated auto paper.  Two year AAA-rated bonds are trading at swaps plus 8bp in secondary markets.

JP Morgan predicts that 2021 issuance volume will equal that of 2019 - the last full year before Covid 19 hit. This is another indication of how far and fast the market has recovered from the dark days of March 2020.

Of course, not everything in the garden is lovely. Consumer credit is still expected to be moderately weaker in 2021 as unemployment remains at elevated levels.

Moreover, though there have been extensive government and lender-based payment relief programmes which were put in place early in the pandemic, evidence suggests that borrowers that spent some time in forbearance are more likely to default at some stage than those that spent no time in forbearance even if debt payments are current at the moment.

The spectre of Libor replacement also hangs over the market. Even though the day of reckoning is likely to be set back until mid-2023, this is merely a stay of execution rather than a reprieve. All ABS markets will be affected by whatever decisions are made new benchmarks to replace Libor but none more so than the student loan market. Most student deals are long-dated, will be around after 2023 and have no transition language in place.

For example, Federal Family Education Loan Program (FFELP) ABS bonds have not demonstrated the same capacity for recovery as have other sectors of the wider market. Subordinate tranches are 80bp wider year-on-year, 125bp wider than the 24-month lows, and 50bp wider than the post-pandemic 24-month average.   

Simon Boughey

Other deal-related news

  • Fitch says it expects to change a significant portion of its CLO outlooks to stable from negative, following the revision of its CLO coronavirus stress scenario to assume half of the corporate exposure on negative outlook is downgraded by one notch instead of 100% (SCI 25 January).
  • Hertz auto ABS noteholders and the company have agreed to extend the forbearance arrangement for another nine months through to September 2021 (SCI 25 January).
  • Dock Street Capital Management has been appointed as the replacement collateral manager to ABS CDO TABS 2004-1 (SCI 25 January).
  • Moody's has published a freely available version of its Multi-Class model, which enables users to evaluate a given capital structure for certain ABS and RMBS asset classes (SCI 25 January).
  • Downward pressure on interest rates in the UK auto market is anticipated, due to increased disclosure requirements and a ban on discretionary commission models that come into effect on 28 January (SCI 25 January).
  • Fitch reports that a material number of aircraft failed to be novated to two aircraft ABS - START III and Lunar 2020-1 - last year, following closing (26 January).
  • dv01 has launched auto benchmark datasets, with the aim of providing investors with loan-level performance transparency on auto ABS (26 January).
  • Kensington is prepping its inaugural STS and what is believed to be the UK market's first ESG RMBS (SCI 27 January).
  • PHEAA has launched a series of consent solicitations seeking investor approval to amend the terms of indentures related to its outstanding tax-exempt bonds and notes issued by various PHEAA student loan ABS trusts, for which the organisation acts as administrator (SCI 29 January).

Company and people moves

  • Golub Capital has made a number of senior-level promotions in its direct lending, structured products and investor partners group teams (26 January).
  • Apollo Global Management chair and ceo Leon Black is set to retire as ceo by 31 July and will be succeeded by Marc Rowan as ceo, but continue as Apollo's chair (SCI 27 January).
  • Singapore-based direct lender Orion Credit Capital Asia has received an equity investment from OMERS, the pension plan for municipal employees in Ontario, Canada (SCI 28 January).
  • Jonathan Graber has joined SC Lowy's distressed debt and special situations trading and investing team in London (SCI 28 January).
  • Gildenbrook Group founder and ceo Daniel Brookman has launched Gildenbrook Capital Management, an independent ILS fund manager (SCI 28 January).
  • Rebecca Levy has joined CIFC Asset Management as an md in the firm's investor solutions group (SCI 28 January).
  • Credit Suisse Asset Management has named Kevin Lawi md, portfolio manager and head of origination - private credit, based in New York (SCI 28 January).
  • Matthew Downs has joined Greystone as md on the CMBS lending team, reporting to md Robert Russell (SCI 28 January).
  • LendInvest has secured a £500m investment from JPMorgan in future mortgage originations, following the sale of a £125m mortgage portfolio to the bank in September (SCI 28 January).
  • KKR has appointed Michael Small as a partner in its European credit and markets team, with origination, execution and fundraising responsibilities for the private credit business (SCI 29 January).
  • Hong Kong Mortgage Corporation (HKMC) and MUFG Bank have signed a memorandum of understanding regarding an infrastructure loan sales framework, with the aim of facilitating loan sale cooperation between both parties (SCI 29 January).
  • David Hu, managing partner and cio of New York-based investment advisory firm International Investment Group (IIG), has pled guilty before US District Judge Alvin Hellerstein to investment adviser fraud, securities fraud and wire fraud offenses in connection with an over US$100m scheme to defraud IIG's investment advisory fund clients and investors (SCI 29 January).

Data

Recent research to download
Greek CRTs - January 2021
Insurer Involvement in SRT - December 2020
CLO Case Study - Autumn 2020

Upcoming events
SCI's 2nd Annual Middle Market CLO Seminar
25 February 2021, Virtual Event
SCI's 5th Annual Risk Transfer & Synthetics Seminar
March 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
May 2021, Virtual Event


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