ABS issuance to remain strong in 2013 after 2012 comeback

Tue Dec 11, 2012 12:55pm EST

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NEW YORK, Dec 11 (IFR) - After making their strongest comeback since the 2008 crisis in 2012, asset-backed securities (ABS) are expected to remain an attractive safe-haven in 2013, according to securitization specialists.

Issuance of consumer ABS -- bonds backed by auto loans/leases, credit cards, equipment loans/leases and government-guaranteed student loans -- climbed to US$190 billion in 2012 from US$126bn in 2011, as investors searched for yield in a low-rate environment.

"2012 marked only the second year-over-year growth since 2006," said Jay Steiner, head of banking and origination in the Structured Credit division at Deutsche Bank in New York.

Consumer ABS, particularly autos, have become an effective cash surrogate for investors looking to park their money somewhere offering a higher yield than Treasuries with a similar level of safety.

The trend has held up even as demand has meant lower yields for investors -- yields on Treasuries are still lower.

"Investors enjoy the certainty when you have assets behind your bond," said a senior ABS banker at a top structured finance underwriter. "Moreover, in this market environment, every basis point you can get counts."

The relative safety of autos, cards, equipment and legacy loans from the government's now-defunct Federal Family Education Loan Program (FFELP) are expected to lead to consistent demand and tighter spreads.

Investors who want to outperform the market in 2013 are likely to move into off-the-run and esoteric ABS sectors, including timeshare, servicer advances and structured settlements, as a result.

Investors may also move down the capital structure of benchmark Triple A ABS sectors or switch from one-year to two-year notes in order to earn incremental spread.

DEJA VU AGAIN

The familiar 2012 themes of low yields, supply shortages and lackluster economic growth, as well as the headwinds of US and European sovereign risks, are expected to continue in the new year.

These are in addition to the uncertainty of the looming "fiscal cliff," the name given to the steep tax increases and deep spending cuts that will automatically kick in in January if Congress and the White House do not act to stop them.

"The impact of the fiscal cliff on ABS will depend on how long and painful the negotiation process is to resolve all cliff items and the extent and impact of the resulting fiscal austerity," said Bank of America Merrill Lynch ABS strategists led by Chris Flanagan, Theresa O'Neill and Matthew Carr.

Early projections for 2013 ABS issuance have begun to roll in and JP Morgan analysts Amy Sze and Kaustub Samant are forecasting US$205bn-$215bn in gross supply, fuelled by the auto and credit card sectors.

"Once broader markets get past the looming US fiscal cliff, drivers of non-mortgage ABS performance in 2013 are likely to be similar to those we enumerated last year," said Astorina.

He is predicting US$160bn-$185bn in non-mortgage ABS volume.

JP Morgan and Barclays analysts believe auto ABS supply will approach US$95bn. JP Morgan says this would be consistent with auto sales, which are expected to exceed a 15m SAAR (seasonally adjusted annual rate) next year. Year-to-date auto ABS volume is about US$90.8bn, IFR Markets and Thomson Reuters data show.

"While the market has not yet returned to peak auto ABS volume of US$110bn (2005) per year, issuance continued to be massive and was a larger driver of volume than expected," said Deutsche Bank's Steiner.

The auto sector is likely to face two major challenges in the new year: how much further spreads can tighten, and whether investors will seek higher returns elsewhere.

While spreads have not touched pre-crisis lows, yield levels have done so. This August a Nissan transaction achieved a then-record low all-in yield of 0.481% only to be broken a month later by USAA at 0.441%.

While volatile domestic and foreign headlines are expected to keep demand for benchmark auto deals strong, underwriting standards may have to be loosened, especially in the subprime sector, in order to keep yield-hungry investors in the market. One senior ABS banker thinks the FICO standard may dip from the 550 range to 525.

Meanwhile, credit card projections vary with JP Morgan calling for US$45bn-$50bn in credit card ABS supply along with an estimated US$40bn in run-off, which would result in net supply of plus US$5bn-$10bn. The bank's year-to-date credit card ABS volume is US$37bn, versus US$65bn in run-off.

JP Morgan analysts expect cross-border credit card ABS activity to remain strong in 2013, with Canadian US dollar issuers offsetting lower UK issuer participation.

An increase in subordinated issuance is also likely as ABS spreads continue to tighten. Barclays predicts US$25bn-$30bn in credit card issuance.

Meanwhile, the consensus is that student loan ABS volume will remain flat to slightly lower at approximately US$25bn.

"There is a pipeline of FFELP receivables from lenders' balance sheets and conduit funding programs to the ABS market, as well as restructuring opportunities (albeit 2013 may well be the end of the line)," said Sze and Samant.

Even a US sovereign rating downgrade by another agency is only expected to cause minor hiccups, as spreads have rallied and deals have launched with split ratings on senior tranches.

Lastly, the equipment sector is expected to see modest growth and could improve to US$12bn-$15bn from the US$10bn recorded through November 2012.

Analysts say there is a healthy list of diverse issuers in the large- and small-ticket segments to support issuance activity. Business spending should also improve with economic growth.

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