The only certainty is uncertainty, as the saying goes. Despite these uncertain times, however, the structured finance market is expected to weather the storm. flow’s Janet Du Chenne takes a look at the forecasts for the year ahead
Structured finance issuance is holding steady. S&P’s recent 2019 outlook webinar set the scene, noting over US$1trn in issuance in 2018, a 12% increase over the US$970bn figure of 2017. It said that while recovery could be impacted by the renegotiation of existing trade agreements, Brexit and rising macro-economic and political uncertainty globally, it expects 2019 issuance volume to be roughly US$1trn, with even higher issuance in 2020. In the US, the expectation is for U$535 billion in new issuance in 2019, up from US$530bn in 2018.
There are a number of key trends underpinning these expectations for the structured finance market in 2019:
Auto loan ABS issuance and student loan refis to increase
S&P forecasts issuance growth in Auto Loan ABS of 5% to US$86bn in 2019 from US$81.7bn in 2018. It also sees further growth in student loan ABS with refi companies set to drive issuance in this sector to US$18bn. In the private student loan ABS issuance and refinance the forecast is $20bn.
Given investor appetite there is a growth opportunity for refinancing in the private student space and they must attract the refi rate for their refi loans. Borrowers are seeing opportunities to refinance and decrease their borrowing costs.
In addition, the securitisation of aircraft leases appears to be taking off again and will remain an important source of financing for the aviation industry with Deutsche Bank’s research team noting that air traffic is expected to grow 6% annually and load factors to reach 85%.
CLO issuance to decrease
Given the uncertainty globally, a moderate overall decline in collateralised loan obligations (CLOs) volume is expected. According to Deutsche Bank research, 2018 issuance volume for US CLOs surpassed US$124 bn, confirming 2018 as an all-time record year for CLO issuance (see figure 1). In its latest securitisation outlook, the Deutsche Bank team expects a gradual widening of spreads with the withdrawal of central bank liquidity, heightened uncertainty around Brexit, strong supply, and increased macro turmoil, which were all gradually priced in during 2018.
A no-deal Brexit in the near term could affect the sentiment in the CLO market, and European Central Bank Quantitative Easing, which has the potential to cause further spread widening in 2019, underlines the need to not be aggressively positioned, according to Deutsche Bank research.
Prior to publication, the research team forecast US CLO issuance to be US$110 bn and European issuance to be US$ 25 bn in 2019 (see table below).
Technology to aid CLO portfolio management
Many credit investors believe the US corporate credit cycle is in the later stages and ubiquitous issuance of covenant-lite loans will lead to lower recovery rates, notes Alex Cormas in the Deutsche Bank Corporate Trust sales team. If this occurs, managers of CLOs would need to closely monitor compliance tests to ensure their CLOs are not failing those tests, which would mean certain noteholders would potentially not be paid.
However, new technologies from corporate trust providers such as Deutsche Bank provide the assurances needed, explains Cormas. “With our technology, managers who are concerned about ratings downgrades and defaults can go online and instantly see whether CLOs are passing or failing compliance tests,” he says. “This is more efficient than telephoning their trustee for a report. This technology is further supported by people at the bank who have the product knowledge and experience of the last credit cycle, and can support our clients through any future down cycle.”
Through tools such as Issuer Services Deal Manager, managers have easy access to their portfolios and transactions, providing them with data transparency to enable them to quickly and efficiently monitor and adjust their portfolios if necessary. These tools also provide managers of CLOs with the access to real time data that issuers and investors are demanding from them.
We have continually delivered meaningful solutions that have helped managers deal with on-going uncertainty in the market, adds Stephen Hessler, Deutsche Bank Corporate Trust Sales. “Through Issuer Services Deal Manager, we have been developing and improving how we are able to deliver data and information for structured credit transactions.”
A globally coordinated effort to move market exposures away from IBORs to alternative risk free rates (RFRs) is progressing. However, the question remains what kind of fallbacks are in existing documentation for legacy CLOs, and whether the market can transition to new rates fast enough. If a new methodology is approved but the new rate is materially different, then that amounts to a new rate. In that situation, existing transactions will have to transition to a new rate - either with deal level amendments or via some overarching industry legislation. Deutsche Bank’s rates research team published a Q&A addressing a range of topics including progress made in various jurisdictions to RFRs and issues faced by investors in transitioning to them.
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