Off-beat ABS finds growing acceptance from investors

Fri Dec 14, 2012 12:31pm EST

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Dec 14 (IFR) - The success achieved by off-beat ABS - particularly those that securitise railcar receivables - has added much-needed diversity to this year's resurgence of the US structured finance market.

Trinity Rail Leasing raised US$333.84m last week from a tightly priced and well-distributed ABS that reflected the growing acceptance of the rare product class.

The issue followed an ABS from peers American Railcar, which came to market earlier this month with a US$215.95m deal.

For investors, railcar ABS offers a stable and predictable cashflow - the leases tend to be for multiple years, and the lessees of relatively high quality.

In addition, off-the-run ABS is offering incremental yield pick up for investors at a time of very tight spreads in the credit market.

"The investor base for railcar leasing ABS is definitely broadening because there is demand for diversity and stable cash flow assets," said one senior banker.

"The two-tranche structure adopted first by Trinity in 2011, and again in the latest transaction, is another feature that is gaining acceptability among issuers and investors."

INCREASING DEMAND

According to a presale report on the Trinity deal from S&P, railcar demand was strong from 2004 to 2007 but then declined through early 2010 due to the weakened US economy.

Railroad traffic has increased since then, although demand for certain leased railcars - particularly those that transport petroleum and intermodal traffic - has not returned to 2007 levels.

The new Trinity deal securitises not only the leasing revenues but also the railcars themselves, offering investors hard assets and improved collateral quality.

The deal, led by Credit Suisse (structuring lead) and Credit Agricole, securitises a US$430.8m portfolio containing 4,866 railcars.

Trinity Rail Leasing 2012, the bankruptcy-remote limited liability issuing company, has the right to lease revenues from the portfolio and any residual cashflows from the sale of railcars.

Trinity's US$145.36m Class A1, with an average life of 4.82 years, priced with a spread of 155bp over interpolated swaps for a yield of 2.276% and coupon of 2.266%.

The US$188.48m A2s, with a 10.07-year bullet maturity, paid a yield of 3.55% and coupon of 3.525%.

The 2011 deal from Trinity, a similarly structured US$857m offering, priced its A1 tranche with a coupon of 4.37% and the A2s at 6.024% - or almost double the levels achieved in the latest deal.

Meanwhile the American Railcar Leasing 2012-1, a US$215.95m ABS, was comprised of A1s with a 4.93-year average life paying 175bp over one-month Libor coupon, and A2s with a 9.99-year average life paying a 3.81% coupon.

Perhaps the most surprising part of the new Trinity deal is that the notes priced tighter than a recent container lease ABS - a much more popular and well-accepted product.

CAI Container 2012-1 in October priced a US$171m 5.06-year average life tranche at a coupon of 3.47% - at least 100bp outside the Trinity A1s.

MORE ON THE WAY?

Expectations are that this enthusiasm for off-beat ABS would encourage other non-traditional issuers like aircraft lessors to again consider securitisation in their funding plans.

Pooled aircraft leasing receivables were heavily securitised up until 2007, but with the onset of the subprime crisis, aircraft lessors have found more flexibility in the bank loan and high-yield market.

With the Federal Reserve continuing to pump markets with liquidity this year, for example, aircraft lessors have found unsecured bonds to be an attractive option over the ABS market.

So far this year, aircraft lessors have raised around US$5.6bn from the high-yield bond markets - even though they are pricing their bonds wider than what could be achieved in ABS market.

On November 27, regular bond issuer Aircastle (Ba3/BB+) raised US$500m from an upsized seven-year trade that was issued at par and paid a 6.25% coupon.

"We hear the same thing in every securitisation conference - that pooled aircraft leasing ABS will come back soon, but it is not happening because bank and bond markets continue to offer the flexibility that the securitisation market cannot," said one senior banker.

"There is rigidity in the ABS pool structure in terms of adding or removing collateral which is not the case with a high-yield unsecured bond issuance, and that is the reason these issuers are still sticking to the bond markets. This Trinity deal's pricing should however prompt some rethinking to this though."

Another banker said: "(Pooled aircraft receivables ABS) should ideally make a comeback. The latest Trinity deal showed that issuance conditions for off-beat ABS are ideal at the moment, because there seems to be a rising hunt for diversification and long-dated fixed rate products."

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