There was plenty to discuss at the Structured Finance Association's largest capital markets conference, SFVegas 2024, in Las Vegas from February 25–28, 2024. SFVegas represents the largest annual gathering of securitization professionals worldwide — a destination for the full spectrum of market participants, including investors, issuers, financial intermediaries, regulators, law firms, accounting firms, technology firms, rating agencies, servicers and trustees.
Here's what we heard:
Unsecured Consumer ABS
- Consumer Performance and Risk Factors:
Economists are calling for a soft landing in the market, with a
tightening of market conditions. There are concerns about factors
such as increasing unemployment and the expiration of the Biden
administration's 12-month grace period for student loans.
Consumer credit is impacted by inflation, disposable income, and
the rising costs of essentials like gas, rent, and insurance.
- FICO Scores and Access to Liquidity: FICO
scores are on the rise, and there are differing views on access to
liquidity in the market. Maintaining liquidity is important,
especially in volatile markets with changing rates.
- Market Conditions and New Entrants: Current
market conditions may be conducive to new players, but there are
infrastructure requirements and the need for equity on the balance
sheet. ABS is suitable for large pools of homogeneous assets, and
there is interest in structured products to diversify
spreads.
- Banking Industry Changes: The banking industry
has seen changes post the banking crisis, with banks making
adjustments to manage risk-weighted assets. Some banks have exited
certain businesses, creating opportunities for new market entrants.
Basel III and other regulatory changes have impacted the capital
market landscape.
- Hedging Strategies and ESG Considerations:
Issuers are rethinking hedging strategies to cover unforeseen
events. ESG considerations are becoming important, focusing on fair
lending practices and consumer understanding of products.
- Predictions and Future Scenarios: A soft landing with weak inflation is seen as a likely scenario, with potential cuts in interest rates over the year. Economic indicators such as wage growth, unemployment rates, and FICO scores will play a role in determining future scenarios.
Rule 4(a)(2) Offerings Will Continue to Be a Trend
Private offerings via Rule 4(a)(2) will continue to appeal to certain subsets of investors and issuers:
- Benefits of a Rule 4(a)(2) offering for investors:
- Investors can tailor an offering to meet their specific risk
requirements.
- Investors are able to capture the liquidity risk premium for
holding less liquid 4(a)(2) securities. Insurance companies and
similar investors who may not prioritize liquidity as much as other
investors benefit from the additional return on 4(a)(2)
securities.
- Investors have access to additional due diligence information
from the sponsor that they often do not have access to in a Rule
144A/Reg S offering, including information that is tailored to the
investor's due diligence process.
- The costs associated with a 4(a)(2) offering can be lower than
those associated with a Rule 144A/Reg S offering because the
investor can agree to forgo the preparation of an offering
document. The investor can also negotiate for specific disclosure
requirements that are pertinent to its review of the
transaction.
- Investors can tailor an offering to meet their specific risk
requirements.
- Benefits of a Rule 4(a)(2) offering for sponsors and
issuers:
- A Rule 4(a)(2) offering exposes the sponsor to different
pockets of investors that may not be active in the Rule 144A/ Reg S
offerings for the sponsor, increasing the investor pool for the
sponsor's issuance platforms.
- A Rule 4(a)(2) offering allows a sponsor to test new
transaction structures and solicit investor feedback before
marketing in the Rule 144A/Reg S market.
- A sponsor can bring smaller pools of assets to the Rule 4(a)(2) market and the transaction remains profitable due to the lower costs associated with Rule 4(a)(2) offerings.
- A Rule 4(a)(2) offering exposes the sponsor to different
pockets of investors that may not be active in the Rule 144A/ Reg S
offerings for the sponsor, increasing the investor pool for the
sponsor's issuance platforms.
Credit Unions Will Remain a Growing Player in the Auto ABS Market
- Credit unions nearly tripled 2022's volume for auto loan
ABS.
- Five first-time credit union ABS issuers came to market in
2023, and two credit unions issued their second securitizations. It
is expected that several of these issuers will securitize auto
loans in 2024.
- Securitization provides an additional means of financing auto
loans, in addition to financing channels traditionally used by
credit unions, such as deposits and whole loan sales and
participations.
- Securitization allows credit unions to access a larger and more
diverse investor base, and in many instances, an investor base that
has not been previously accessed by the credit union.
- Credit unions can look to use ABS to expand the geographical reach of their auto-lending platforms and increase loan volume.
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