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Outlook Sketchy for Still-Frozen Issuance
Asset Backed Alert, Harrison Scott Publications Inc. (January 9, 2009)
Securitization volume is likely to rebound moderately this year in the U.S. and decline in Europe, as both markets struggle to pull out of a prolonged funk.
Even that's just a guess ventured by less than 20 industry insiders who are willing to predict whether the battered structured-finance market will start recovering from a worldwide credit crunch that took hold in mid-2007. In a display of widespread uncertainty, most other securitization professionals feel that projecting what will happen over the next 12 months is a crapshoot at best.
In the U.S., a field of 10 market players who responded to a survey by Asset-Backed Alert have predicted, on average, that issuers will sell $218 billion of public and Rule 144-A asset-backed securities in 2009. That translates into a 44% increase from the 2008 issuance total of $151 billion, which was down by $447 billion, or 75%, from the year before, according to the newsletter's ABS Database.
In Europe, eight forecasters have called for structured-finance issuance to plunge by 45% this year, to the equivalent of $564 billion. Among other things, they figure the European Central Bank and Bank of England will eventually pull back after propping up the market for more than a year. Their projections include bonds sold to investors and those funneled into funding agreements with the central banks.
Like their U.S. counterparts, issuers in Europe are still finding it extremely difficult to line up buyers for their paper. Only $178 billion of the region's offerings wound up in the hands of actual investors during 2008, as issuers funded another $855 billion by tapping central bank lending programs.
The European Central Bank and Bank of England also supported many European securitizations, totaling $521 billion, that were conducted in 2007. The regional volume of deals sold to third-party investors hit a record high of $526 billion in 2006, the year before the market turned sour and the central banks stepped in to bail out issuers.
Back in the U.S., prognosticators believe this year's deal flow is unlikely to advance much beyond levels last seen around 1997. Annual issuance peaked at $907 billion in 2006, after increasing virtually every year since the inception of the asset- and mortgage-backed securities market almost 30 years ago.
At this point, most players figure the new-issue pipeline couldn't possibly contract any further - especially since the U.S. Treasury Department, Federal Reserve and other government arms are still mounting ambitious efforts to inject liquidity into the stalled credit market.
For example, the Fed's $200 billion Term Asset-Backed Securities Loan Facility (TALF) "should help to stimulate activity in auto, credit-card and student-loan ABS in the first half of 2009," said Edward Gainor, a partner at law firm McKee Nelson. The program, which is due to get underway next month, would seek to foster consumer lending by allowing buyers of new securitized products to borrow against those holdings.
Gainor predicted $300 billion of ABS will be completed by yearend. Only mortgage broker Evan Mitnick submitted a more bullish forecast of $400 billion, saying that falling interest rates will kickstart MBS issuance and get things moving in other securitization sectors. Mitnick is co-founder of Anchor Street Mortgage, a brokerage startup in Parsippany, N.J. (see article on Page 3).
Bruce Dobish, president of distressed real estate buyer Lender Services Properties in Hewlett, N.Y., floated this year's most bearish forecast: $90 billion. His year-ago prediction of $275 billion was also the most conservative, making it the most accurate (see article on Page 7). Meanwhile, one buyer of distressed mortgage bonds said he believes issuance won't top $70 billion this year. He prefers to remain anonymous.
One factor that's likely to affect issuance volume going forward is the availability of cheaper funding sources. In November, for example, American Express and GE Capital turned to selling unsecured debt with FDIC guarantees likely to fund their credit-card and auto-loan receivables (see article on Page 4). Bank of America and Capital One, who have long been active card-bond issuers, recently started drawing more heavily from customer deposits to support their lending activities.
Nevertheless, the overall issuance drought could end if a substantial amount of investors start coming back to a market they have largely abandoned. That, in turn, could drive down issuers' funding costs.
"I think it's going to be a little bit less expensive for the auto [issuers] this year," said Allan Berliant, a GMO portfolio manager who estimated that $200 billion of U.S. securitizations will get done in 2009. He runs several billion dollars of top-rated structured products for the Boston money manager.
In Europe, handicapping new-deal volume is even more tricky because it's unclear how long securitization issuers can rely on central banks to fund their receivables. For its part, the European Central Bank seems willing to keep doing so until early 2010. But officials there have grumbled for months about reining in some institutions. They're especially concerned about certain Spanish banks that continue to write and securitize huge volumes of residential mortgages.
All but 17% of Europe's securitizations in 2008 were retained by issuers, who used them to back corresponding loans taken out through repurchase agreements with the European Central Bank or Bank of England. More than $200 billion of deals - mostly residential MBS - were conducted via this method in December alone.
The retained securitizations were often large, frequently topping $10 billion apiece. The most prolific issuers last year were U.K. home-loan giants HBOS, which funded œ51.3 billion ($88 billion) of MBS through the central banks, and Royal Bank of Scotland, which weighed in with œ77.6 billion.
U.K. mortgage lenders Lloyds TSB and Nationwide Building Society also tapped the central banks heavily last year. So did Spain's Banco Santander and Bilbao Vizcaya Argentaria; Italy's Intesa Sanpaolo and UniCredit; Amsterdam-based ING and Brussels-based Fortis Bank.
Given the lack of "bona fide" issuance, European professionals are more reluctant to make issuance forecasts than ever before. "Everything is in such a state of flux, it's just too difficult to say," said one market player who has put forth estimates in the past. "I don't feel comfortable going out on a limb this year."
Among those who did step forward was Kristof Moens, who until recently worked as Fortis' head of ABS banking. He came in the lowest at $200 billion, noting how "the ECB does not want to be a permanent buyer of ABS." Moens also speculated that most issuers have already exhausted their need to use the central banks' funding programs to move unwanted assets off their books.
At the other end of the spectrum, Jim Irvine of Henderson Global Investors projected a 6.5% increase in European securitization issuance this year, to $1.1 trillion.
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. v