Asset backed securities: Stormy weather for investors?
Today’s climate for investors in asset backed securities is anything but dreary. The complex combination of a COVID lull, war in Ukraine and a wind-down of central bank asset purchases creates a whirlwind of challenges. Add to that a large pinch of inflation and a sprinkling of supply chain chaos and you have a spicy recipe for investors. We cast an eye over this dynamic landscape with Thomas Docters van Leeuwen, Director Alternative Credit, DCM Syndicate ABN AMRO. Docters van Leeuwen is member of the discussion panel “Investor Appetite: Demand vs. Supply” during the Securitisation Event in Amsterdam on April 21.
What does the investor landscape look like from where you are sitting?
Strangely, the COVID-19 situation feels like it was a while ago now. I think we all want to mentally say goodbye to it. Also, the new crises which have since arisen also make us forget. As the world seems to be coming out of the COVID situation, we see central banks announcing that they will be toning down their asset purchasing support.
What effects does that have?
Markets are obviously reacting to this situation. This is because in part the strength we have seen in financial markets was also caused by the strong support shown by the central banks. That withdrawal creates a wider volatility in financial markets. The war in Ukraine is obviously amplifying that. Political risks are increasing, and new supply chain problems have also arisen. This all adds up to inflationary pressure which may also prompt central banks to move even further away from low interest rates and asset purchase programmes.
How is that affecting securitisation?
Investors see securitisation as a relatively short duration floating rate market. So, as a niche within a wider financial markets, securitisation is well positioned in today’s challenging environment. That is also reflected in the current performance, relative to other asset classes. In January this year for instance long duration stocks and bonds were severely hit, but securitisation was hardly affected. In the longer term we do see that also in ABS spread widening is a theme and I think we all expect that to continue for a while going forward from here.
Do asset backed securities suffer from the current market volatility?
Asset backed securities are relatively illiquid products, so we certainly do not see the daily spikes and lows which you see on the equities market. But there is, for example, a price difference today compared with three weeks ago. Asset backed securities are often advocated as a less correlated asset class. I think we see in volatile times that there is some merit to that. So, while there are price shifts, you do not see sharp levels of volatility in ABS generally. What you do see is that the primary market closes down for a little while. So, when there is increased uncertainty, parties delay coming to market, or they do more private placements, for example.
How is the balance between demand and supply in the securitisation market from your perspective?
I am primarily focussed on Euro-based securitisations and that remains an under-supplied market. There are some dynamic shifts taking place in the market: for many of the securitisations in the recent past we have seen the central banks order up to 50% of the A-tranche in transactions for which they qualify. We expect that type of participation to be toned down this year. That will be a difference, but I do not expect this reduction to cause a huge shift in the market. What we have seen up until now is that there is more demand for securitisation paper in euros than there has been supply.
Are the other significant developments in the securitisations market?
In recent years we have seen an ever-growing number of sponsor-owned platforms gaining market size. This was also due to the fact that the former main group of issuers, the regulated banks, were moving away from the securitisation market. To a certain extent because there was so much alternative means of funding available to them. It will be interesting to see, as those ECB and government support programmes fade out further, if there is a move back from the regulated issuer space to the securitisation market. That could cause a shift in balance, but it’s too early to call at this point in my view.
What are the current trends which you see in today’s securitisation market?
Investors appear to be exploring the fringes of the market in order to find more yield. Many of them are getting involved in private deals, or bilateral deals in order to move away from the very competitive middle ground. When the Ukraine war broke out and the primary market stopped for a couple of weeks, we immediately saw a number of privately or pre-placed trades submerge. Which makes sense, as we notice a number of investors are growing capabilities to become involved in more complex transactions, private placements, even taking on some warehouse risk. This is a theme which we have seen develop over the past couple of years, and which appears to be getting more deeply rooted among the wider investor community.
Are there any other key trends?
ESG is a particularly interesting topic. ESG has been the biggest theme by far over the past two years in the corporate bond business. There is also considerable financial interest in ESG-related investments. This also creates a pricing difference between green bonds and traditional grey bonds when more parties are bidding on the green bonds, for example. However, I haven’t seen that type of development yet in the securitisation market. This is, of course, because securitisation often has specialised mandates with end-investors which are not specifically ESG-related.
Another element on the buy side are the liquidity buffers at banks: we are unlikely to see ESG-related considerations in their investment mandates. So, securitisation appears to be moving more slowly on ESG. It seems that the ESG push in securitisation is not coming from the buy side, but from the issuers themselves. Programmes such as Green Strom, but also the more recent Fortuna are a testament to the fact that the securitisation market is catching up in ESG.
What could be putting a brake on the ESG developments in securitisation?
I think data quality is extremely important. For RMBS for example, you need to have access to the underlying data. In the Netherlands we already have EPC labels on all houses. So, using this data it is possible for a bank or another mortgage provider to be able to finance the stock with green versus non-green: this is how the Green Storm becomes green, for example: thanks to the underlying label data. I personally have not seen any significant Green Auto ABS and Euro come to market. That seems a little strange, considering the numbers of electric vehicles on the European roads today. I would have thought it were possible for a large carmaker to construct a deal using that data.
However, we also know that many of the major car manufacturers have corporate bond programs and often also issue green bonds in the corporate bond space. If your green asset base is still somewhat scarce, you may want to use them for one specific program. This is all a bit speculative on my part, but I would expect more to happen on green auto securitisation in future. We have also seen a debut consumer ABS transaction (the aforementioned Fortuna) from Auxmoney, the social consumer lending platform focussed on the under-served in the market. The debut trade was picked up well by the market so, I hope – and think – we can expect more similar initiatives on the consumer side going forward. And that is encouraging.
I am personally interested to hear about this current situation of liquidity versus illiquidity. ESG is also something I’m very keen to hear more about. And also, what do we as a securitisation market expect in terms of the movement of interest rates, which is especially current for RMBS. I’m also eager to hear about thoughts on how the winding down of the asset purchase programmes by the ECB and local central banks will affect the ABS market. I’m also simply looking forward to talking one-on-one in an informal setting to find out what people really think, without the pressure of a specific meeting. Sometimes there is more deal-making over coffee at events like this, than in the official boardrooms!
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