NEW YORK - Steady economic and regulatory headwinds are expected to curb the issuance of consumer debt securitizations in 2010, even after this year's revival in the U.S. asset-backed market.
With the economy struggling to climb out of a deep recession, unemployment high, consumer spending low, and regulatory issues unclear, the issuance of ABS securities is expected to be little changed.
Growth will be moderate at best throughout 2010, as the state of the U.S. consumer and the operating environment for many businesses shows no signs of dramatic improvement, said Dominion Bond Rating Service in its outlook for the market.
Analysts and investors predict issuance will clock in at $140 billion in 2010, close to the $135 billion sold this year with the help of the Federal Reserve.
The Fed's Term Asset-Backed Securities Loan Facility went a long way toward revitalizing a consumer ABS market locked in the grips of a paralyzing credit crisis in early 2009. Reaction to the program's end in March 2010 has been muted, given the dramatic improvement in the market this year.
Under the TALF program, issuers sold $93 billion of securities backed by consumer debt such as auto loans, credit cards, student loans and small business loans, while the Fed provided $53.8 billion of loans to purchase them. TALF was largely credited with pumping liquidity back into the secondary market and leading to a sharp 4 to 5 percentage point contraction in spreads.
FINDING A BALANCE
Auto-related ABS proved to be the most resilient asset class in 2009, with issuers taking full advantage of TALF and issuing $69 billion of securities, double 2008's volume.
But while market technicals have dramatically improved, fundamentals remain a concern. A weak economic climate with more restrained lending and high unemployment will translate into less issuance as consumers borrow and spend less.
Household deleveraging has been one of the key themes this year. That, will persist in 2010 and well beyond that, said Amy Sze, analyst at JP Morgan Securities.
U.S. consumer credit fell for nine straight months this year. In October consumer credit declined by $3.51 billion, according to the latest data from the Federal Reserve. Revolving credit, comprising credit and charge cards, dropped $6.95 billion, or at a 9.32 percent rate, to $888.1 billion.
Concerns on the legislative and regulatory fronts are also expected to crimp issuance in 2010, as a new market begins to emerge with tougher guidelines and greater transparency.
Risk retention, rating agency regulation, transparency reporting and capital requirements are all on the agenda. The challenge will be to find the right balance of oversight and rule that will keep securitization markets open, said Sze.
Under an Obama administration plan issuers of ABS would be required to retain 5.0 percent of performance risk in loans they securitize. ABS transactions would be more standardized and regulators would expand electronic trade reporting.
For consumers, overly strict regulations will ultimately, result in higher costs and less credit availability, said Sze.
Credit card issuance totaled $46 billion this year, a drop of about $12 billion from 2008, according to DBRS.
JP Morgan expects ABS supply to remain roughly flat at $140 billion in 2010, with the bank credit card segment experiencing the biggest contraction.
The main reason is that the top tier banks will have significantly less economic incentive to securitize next year, said Sze.
That's partly because of new accounting standards that will bring assets back on balance sheets, she said.
It will effectively nullify the capital advantage that ABS enjoyed, said Sze.
Through securitization, loans can be moved off balance sheet, bundled together and sold to investors as securities. The process allows lenders to remove current debt from their books to keep credit flowing to consumers for things like mortgages, autos and credit cards.
Concerns that the implementation of accounting standards FAS 166 and 167 would place securitizations back on balance sheet, led credit card issuers to refrain from issuing in the final quarter this year, pending further clarity from the Federal Deposit Insurance Corp. The FDIC recently announced interim rules that would grandfather existing securitizations under old rules until March 2010.
William Bemis, portfolio manager at Aviva Investors in Des Moines, Iowa, is expecting new issue volume to mirror 2009 levels. But on a net basis, he expects issuance to remain negative as issuers look elsewhere to refinance maturing debt.
I don't think you will see even half of the issuance of the over $100 billion in maturing credit card debt in 2010, in the securitization market. That's because issuers can get cheaper funding elsewhere and I expect that they're going to look more at unsecured debt than securitization, said Bemis. (Reporting by Nancy Leinfuss)