New trends in Asset Backed Securities
Cas Bonsema is a research analyst at Rabobank and a member of Rabobank’s Credit Strategy & Regulation team. He covers European Asset-Backed Securities (ABS) as well as covered bonds, with a focus on (Dutch) Residential Mortgage Backed Securities (RMBS). Bonsema looks back on a record year in terms of ABS issuance and sees a number of interesting trends going forward, in both RMBS and Auto ABS.
Are there are specific ABS trends which you see at the moment and looking ahead to the near future?
One trend we saw in the market last year, which has been prevalent this year as well, is the increased presence of non-bank lenders in the ABS market, particularly in UK RMBS. Banks were traditionally much bigger in this market, but there is at present limited urgency for them to replace their cheap central bank funding with ABS funding this year. That’s more a story for 2023 in my view.
What type of lenders are these non-bank parties?
The main non-bank institutions we see issuing ABS are specialist lenders. In the UK for example, there are a number of specialist non-bank mortgage lenders. Also, in auto financing you have the consumer finance branches of car manufacturers such as Volkswagen Financial Services. They generally don’t rely on deposits, like a bank would, for their funding or at least not to the same extent. Hence, these are lenders that typically raise their funding through other means, including ABS. Finally, we have also seen a number of fintechs turn to securitisation for funding.
What are the current trends in Auto ABS?
In terms of issuance last year, we saw a number of large full capital stack deals. Most likely, in my view, those were significant risk transfer deals, not just funding. Hence, they can allow lenders to essentially take exposures off the balance sheet. The transactions came from the consumer finance branches of some large European banks. I expect more of these type of transactions this year. They provide investors with the opportunities to invest in higher risk exposures to the auto sector.
Have you seen other notable market developments?
The trends in automotive financing are shifting towards leasing and usage rather than ownership of the vehicle. That is also starting to be reflected in the Auto ABS sector. Europe-wide we are seeing financing products gradually pivoting towards balloon loans and leases rather than auto loans and more traditional amortizing loans. Auto lease ABS volumes have risen, and we have also seen that the average size of balloon payments as part of the principal balance has also risen, indicating increased use of this financing instrument.
Are car sale developments reflected in Auto ABS?
The type of financed vehicles has changed somewhat. More used cars are now being sold as new car sales have been subdued. Moreover, we have seen an increased presence of non-captive lenders in the Auto ABS market. These are lenders which are not attached to an automotive manufacturer and more commonly finance used cars. These two factors have driven the increased share of used cars in Auto ABS.
We have also seen more alternative fuel vehicles emerge in the Auto ABS sector such as electric and hybrid. That really took off last year, and there is quite strong momentum there. We expect to see alternative fuels filtering through more and more into Auto ABS pools.
Do you think that might eventually lead to green Auto ABS?
That is a certainly a strong possibility. I don’t think we will see a fully green Auto ABS with only electric vehicles in the pool by next year, but I think we will gradually see a move in that direction. Last year, alternative fuel sales accounted for between 35% and 45% of all new vehicle registrations in the five largest European markets: Germany, France, Spain, Italy and UK. I’m sure this will naturally filter through into Auto ABS transactions in the future.
Do you see a wider demand for Green ABS?
From the investor side, there is more and more focus on the topic of green, and sustainability more broadly. Sustainable securitisation issuance meanwhile exploded last year, from a low base, but still. One challenge is that there are a wide variety of energy performance certificates available across Europe and these labels don’t necessarily match up. In the Netherlands though, there is quite good data regarding the energy performance of the housing stock. This data has been accumulating for quite a while, and most properties have an energy label. The proportion of A-label housing stock in the Netherlands is one of the highest in Europe, for example. On a European level however, a lack of data and limited green collateral are barriers and so I think it is still early days in terms of green RMBS.
How has the ABS market developed recently?
2020 was a poor year in terms of ABS issuance. The pandemic situation coupled with the cheap Central Bank facilities (TLTRO, TFSME) and massive deposit inflows at banks reduced their funding needs. By contrast, last year was a really good year. There was a very diverse set of issuance, across a wide range of sectors: particularly in RMBS, Auto ABS and Collateralized Loan Obligations (CLOs). In fact, last year was a record year since the financial crisis in terms of issuance placed with investors. This strong recovery surprised me somewhat given expectations at the start of 2021. As for this year, issuance started off strong but since slowed down in response to the wider deteriorating market backdrop.
What about the future?
I think currently the ABS market, like other fixed income markets, is seeking a new balance between supply and demand amidst macroeconomic and geopolitical uncertainty, and the shifting expectations with respect to central bank policy. We have seen spreads widening somewhat, and issuers appeared to take a pause in early February due to this situation. But then we saw a few transactions and good investor demand for those deals. Overall, looking through the current volatility, I expect this to be a strong year for the ABS market and I expect issuance volumes to even surpass last year’s record on the back of the continued expected economic recovery that will likely boost funding needs. In my view things are looking increasingly positive.
What is Rabobank’s role in the European ABS market?
We as an institution, through our wholly owned subsidiary Obvion, are an established and active issuer of Dutch Prime RMBS via the STORM programme. Moreover, Rabobank has a large and active Asset Backed Commercial Paper (ABCP) programme and that contains a lot of substantial worldwide food and Agri exposures, but also Dutch corporates with a specific focus on leases and auto leases in particular. Finally, we are an active and experienced arranger of ABS transactions in the Netherlands. Overall, there is a lot of knowledge and experience within Rabobank when it comes to securitisation.
What is the attraction of the Securitisation Event?
This event is well-established as the place to be for those interested in ABS in the Netherlands. It brings together industry participants from all over Europe and personally I have always found the panel discussions to be of a very high quality and I always come away with valuable new insights. ABS is quite a niche market, yet one can never know everything about it, as there is a high level of complexity to it. Hence, it’s very beneficial to exchange knowledge with experts in certain asset classes during the event.
What ABS sectors are you particularly curious about currently?
As always the RMBS market, but also Auto ABS and Consumer ABS such as unsecured consumer loans are interesting sectors. There was quite diverse issuance last year, so I shall be keeping an eye out for learning more about these asset classes.
For more information or tickets, visit the eventpage of the Securitisation Event 2022.