Press Room
Flat volumes but improved sentiment for US ABS in 2010
US non-mortgage ABS volumes are expected to remain flat next year, with macroeconomic factors influencing both performance and issuance trends. At the same time, the handful of private deals seen late this year has improved sentiment in the ABS market more generally, potentially laying the foundations for the re-emergence of non-agency RMBS in 2010.
Macroeconomic factors can work for and against the ABS market, according to John McElravey, senior analyst at Wells Fargo Securities. "If consumers pull back further from the economy, there may be less reason to issue," he explains. "On the other hand, banks remain relatively unwilling to lend and so institutions may be forced to tap the securitisation market more. Based on the current situation, issuance volumes are likely to stay flat in 2010 – although if unemployment declines, for example, we could see an increase in volumes."
Wells Fargo predicts that US non-mortgage ABS volumes will total US$150bn in 2010, divided between auto ABS (US$65bn), credit card ABS (US$50bn), US$10bn each for student loan, equipment and other ABS, and US$5bn for dealer floorplan ABS. "Our forecast of US$50bn of credit card ABS issuance for next year assumes moderate issuance from the big banks, but increased private label issuance. These institutions' access to capital is limited and so they have a greater need to issue," says McElravey.
He adds: "The same names are likely to tap the card ABS market as in previous years, with the expectation that some issuers will consolidate. The auto and equipment ABS sectors may see some new names issuing, however."
SecondMarket also expects issuance volumes to remain flat in 2010, albeit this can be regarded as a victory for the market because it will happen without TALF's support. The trading platform forecasts around US$140bn of ABS to be issued next year.
"We expect most issuance next year to be in the auto ABS sector, followed by combined issuance in esoteric asset classes, such as timeshares, lease receivables, containers and aircraft," explains Elton Wells, head of structured products at SecondMarket. "These deals are attractive because of the yield. Off-the-run issuers have different motivations to other institutions: they're tapping the market for funding purposes rather than arbitraging purposes."
Spreads are likely to continue tightening next year, providing there aren't any market events, given the pent-up cash that needs to be put to work. However, this trend raises the spectre of the indiscriminate buying of 2006/2007, where there was little concern about the underlying credit and how the structure links back to the sponsor.
In order to avoid being pressurised to buy in the triple-A space, McElravey recommends that investors spend time doing credit work in off-the-run bonds or subordinated paper. He also favours the auto and equipment ABS sectors for their solid underwriting, credit enhancement levels and structural robustness.
By way of comparison, McElravey points to the weaknesses in credit card ABS that have emerged over the past year (SCI passim). "What everyone liked about credit card ABS was the deep pockets of large sponsors because they were able to support the trusts when necessary, but the downside is that the securitisation is linked more to the credit of the bank than relying on the performance of the assets. Consequently, investors in credit card ABS are exposed to more headline risk and ratings volatility than investors in auto or equipment ABS, which are tied to a single SPV."
