After Vegas, hot ABS market set to roll on

By Natalie Harrison

NEW YORK (IFR) – Structured finance bankers and investors returned to their desks in upbeat mood on Thursday following record attendance at the industry’s biggest annual event in Las Vegas.

The big talking point at the conference, which saw a staggering 6,700 delegates, was the bright outlook for the asset-backed securities market amid optimism about the US economy and a strong investor bid for yield.

“It was the best conference tone post-the financial crisis,” Jay Steiner, co-head of US ABS at Deutsche Bank, told IFR.

“The overriding factor is that while investors are comfortable with fundamentals, the tone is driven by technicals.Investors have capital to deploy, even though spreads continue to compress.”

ABS volumes are running higher than the levels of a year ago, but that is due to a broad-based sell-off in early 2016 that kept many would-be issuers on the sidelines at the time.

The US$32.464bn of supply year-to-date is up from US$27.062bn in the same period of 2016, according to IFR data – and still it has not been enough to satisfy demand.

Deals have been massively oversubscribed and, as the buyside scraps for limited paper, spreads have also ratcheted in – a trend many think will continue.

“Overall the takeaway was strong positive fundamentals, not enough supply and spreads at the tight end,” said Peter Kaplan, a portfolio manager at Merganser Capital Management.

“Technicals are very tight, driven by large amounts of cash sitting on the sidelines.”

Even riskier subprime auto paper has rallied sharply – as much as 150bp in the past couple of months – amid a hunt for yield that could spur more esoteric issuance.

And some see good things ahead for other sub-sectors such as aircraft ABS.

“A few bankers are pushing this more, and it is an area [where] you can pick up more yield,” said Keith Allman, a structured finance analyst at Loomis, Sayles & Company.

“Aircraft deals come with a complexity premium. If you compare them to autos or equipment deals, there are thousands of assets that make up the pool, so it’s easier to do the consumer analysis,” he said.

“In aircraft ABS, you might just have 20-30 assets in a pool and each aircraft has its story. We saw about US$5bn of supply in 2016, but we could see US$8-$9bn this year.”

SEA CHANGE

The other big factor for the primary market, of course, is the prospect of more relaxed regulations under the new US administration of President Donald Trump.

Risk retention – which requires some issuers to keep 5% skin-in-the-game – impacts ABS in particular.

Michael Piwowar, recently appointed Acting Chairman of the US Securities and Exchange Commission, told the ABS Vegas conference last year that he voted against risk-retention rules.

“I was particularly dismayed by the one-size-fits-all approach taken by the regulators to create the 5% risk retention requirement for all asset classes except for securitizations involving qualified residential mortgages, which reduce risk retention to zero,” Piwowar said at the time.

Richard Johns, the executive director of the Structured Finance Industry Group, told IFR that risk retention is likely to be a top candidate for reform, and it could help smaller issuers if it is rolled back, other bankers said.

But the buyside may be reluctant to support a reversal to rules they believe have made the market safer and more orderly, and others are doubtful of sweeping changes.

“A key theme of the ABS Vegas conference was the prospects for regulatory reform, and opinions depend heavily on parochial interests,” Citigroup analyst Mary Kane said in a note published Thursday.

“We would be very surprised to see an about-face on risk retention and loan-level disclosure, which are not Administration priorities.”

Chris Haas, associate general counsel at Bank of America, also offered a note of caution, telling attendees in Las Vegas to avoid mistakes of the past.

“If we focus on that simple question in our actions – is this right for the securitization market? – then we can avoid mistakes from the past and preserve the securitization market for decades to come,” he told a packed room on the first day.

With the 2017 edition of the conference now in the record books, the market is getting back to business, with the pipeline filling up and issuers lining up new public trades that comply with new rules.

Toyota is selling a US$1.5bn deal, just over US$1bn of which will be offered, while GM Financial is out with its first prime auto lease ABS deal of the year.

That US$1.25bn offering is the largest ever off GM Financial’s lease shelf, which bankers said was testament to strong investor demand.

(Reporting by Natalie Harrison; Additional reporting by Joy Wiltermuth, Jack Doran and John Balassi; Editing by Marc Carnegie)