Esoterics More Likely In A Down Economy
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18 October 2011
Securitization Intelligence
Graham Bippart
The esoteric asset-backed securities market is likely to see more one-off deals of non-traditional financial assets and securitizations of assets with less correlation to the broader economy, including renewable energy-linked deals, according to panelists at the Re-emerging And Esoteric Asset Classes session at ABS East Tuesday.
Other classes the panelists said were likely to hit the market were healthcare and life science services-linked securitizations, as well as one-off issuances with cash flows linked to chain restaurants, timber, billboards and even patents, trademarks and legal fees.
Transportation-linked deals have made a comeback so far, but that market will be limited due to its correlation with the economy, said Cory Wishengrad, managing director and co-head of the securitized products origination group at Barclays Capital. Aircraft lease securitizations could be an exception, he added, noting none have come to market yet.
Performance of pre-crash esoteric issuance has been relatively strong compared to other asset classes, despite downgrades and price volatility largely attributable to the downgrades of monoline insurers associated with those deals. "The underwriting assumptions and the underlying rating agency assumptions proved out during the crisis," said Wishengrad, adding that the deals didn't have problems related to "faulty assumptions around home price appreciation," in residential mortgage-backed securities, for example.
But the absence of monolines from new issuance is making deals smaller, said Robert Horowitz, managing director at Guggenheim Securities. "It's tougher to do a $1 billion of a really off-the-run asset when you have to explain to all of your investors what's going on at the asset level."
The lack of monolines is also slowing up the distribution side, Wishengrad added. "It takes more time. The investors do real credit work, we do roadshowing . the distribution process is way more extended than it was a couple of years ago."
Nonetheless, moderator Ronald Borod, partner at DLA Piper, said the esoteric market-which he defined as like Potter Steward's definition of obscenity: "I know it when I see it"-is increasing its share in the face of economic and regulatory headwinds. Quoting numbers he said he couldn't verify with certainty, Borod said that in 2011, the esoteric market is expected to comprise about 26% of the overall ABS market, compared to 9% in 2003. That is in the context of reduced overall issuance in that timeframe, from about $500 billion in 2003 to a projected $89 billion in 2011. |
