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Forecast: Bleak, With Improvement Unlikely
Asset Backed Alert, Harrison Scott Publications Inc. (January 11, 2008)
Don't look for securitization volume to rebound in the U.S. or Europe anytime soon.
Industry experts in both regions are calling for 2008 issuance totals to come up well short of 2007 levels - offering one of the first real glimpses of the post-credit-crunch market landscape. The projections also offer a reiteration of how the subprime-mortgage crisis created a domino effect that drove investors away from all types of structured products and jacked up funding costs, especially after midyear.
In the U.S., a field of 16 market players surveyed by Asset-Backed Alert have forecast, on average, that issuers will sell $459 billion of new SEC-registered, and Rule-144A asset-backed securities in 2008. That translates into a 22% drop from the 2007 total of $594 million, which in turn represented a steep plunge from the 2006 count of $907 billion.
In fact, if the 2008 estimates prove correct, the once-booming U.S. market would experience a five-year setback in deal flow, according to Asset-Backed Alert's ABS Database. The projected 12-month total would be only slightly above the tally for the first six months of 2007, which stood at $431 billion.
In Europe, 10 specialists are calling for a 2008 decrease of 35%, to $341 billion. While that dip is larger than the one forecast for the U.S., the opposite was true in 2007, when issuance in Europe fell just slightly, to $521 billion from 2006's $526 billion despite a broad lack of liquidity.
The 2008 estimate would rewind European issuance to 2005 levels.
The bearish 2008 forecasts on both fronts reflect a consensus among professionals who work on asset- and mortgage-backed securities that any recovery from last year's credit-market disaster probably won't begin to materialize until late this year - possibly heading into the third or fourth quarters. And even that might be wishful thinking.
"If you build off the trends of the second half [of 2007], you'll have very little new [deals] being done in 2008," one banker in the U.S. said. "There will be no CDOs and virtually no residential mortgages and commercial MBS, so what does that tell you?" There are still some hints of the optimism that was long a calling card of those making a living in securitization, however. In fact, two forecasters are even calling for issuance to increase slightly in the U.S. this year.
One of them is Adrian Katz, who serves as chief executive of trade-payment firm Finacity in Stamford, Conn. He is predicting that $600 billion of asset-backed bonds will make their way to market this year, fueled partly by companies that need funding, but no longer have access to out-of-favor structured investment vehicles. "I think shorter-duration assets will be more successful types of collateral in 2008. The idea of pricing long-term assets with short duration liabilities is going to be difficult," he said.
Only Evan Mitnick of Westwood Capital submitted a more bullish forecast than Katz, at $650 billion. But even if he and Katz are outliers as far as full-year predictions go, the average expectation is for somewhat of a gradual pick-up from the second half of 2007, when issuance plunged to $163 billion.
Everyone else in the survey believes deal volume will continue that year-over-year slide, which began with the implosion of the subprime-mortgage business - the largest source of assets for securitizations in the States. That's especially true for the first part of 2008, particularly among mortgage-related asset classes, although a certain number of issuers are sure to be around in all but the most dire of circumstances.
"It's going to be a market without subprime, from an issuance point of view. But the issuers are going to have to come out. They need the money," said Allan Berliant, who runs a $13 billion portfolio of investments in triple-A-rated structured products at Boston money manager GMO.
Berliant, who is calling for $523 billion of deals to hit the market in 2008, was the most pessimistic, and thus, the most accurate, forecaster of U.S. issuance in 2007 (see article on Page 4). This year, the challenge for issuers will be locating investors who are willing to live with more volatile bond values than they are used to seeing on securitized products, he said.
Distressed real estate buyer Bruce Dobish, president of Lender Services Properties in Hewlett, N.Y., takes the most conservative view of 2008 issuance. He projects that a paltry $275 billion of deals will make it to market this year, attributing the drastic decline to a lack of the mortgage-related collateral that spawned rapid growth for the structured-finance market in previous years.
"Lenders just aren't giving loans to alternative-A and subprime borrowers anymore," he said. "I think it's still pretty bad out there." Dobish, a former director of mortgage-related investments at bond insurer FGIC, now buys foreclosed-upon properties in the New York area, including those tied to securitized loans.
A lack of buyers, as opposed to a drought of assets, is taking center stage in Europe. "We've lost a lot of investors semi-permanently," said Andrew Dennis, who heads UBS' asset-backed securities syndicate desk in London. "There's no immediate group of investors that's going to take their place."
Dennis' $475 billion prediction for 2008 issuance makes him the most optimistic of European prognosticators. Damon Mahon, who works on J.P. Morgan's syndicate desk in London, is taking the most-bearish view, with a $200 billion prediction. Unlike some others, his estimate excludes issuer-retained bonds that benefit from repurchase agreements with the European Central Bank.
As the structured-finance market came to a standstill in August, ECB started offering such funding agreements in an effort to restore liquidity - and industry players believe almost all of the transactions printed in Europe since then have taken advantage of the support. The use of ECB repo lines is likely to continue for the foreseeable future as well.
Consequently, it's difficult to say how many securitizations in Europe are actually making it into the hands of investors the traditional way.
The Europe forecasts include asset-backed securities, residential and commercial mortgage bonds and CDOs. The U.S. estimates, however, leave out CDOs, CMBS and securities backed by prime-quality home loans. Both exclude asset-backed commercial paper and synthetic issues.
Most of the forecasters base their predictions on Asset-Backed Alert's volume figures. Therefore, some of their totals may not match up with those published in their own reports.