Wall Street’s debt securitisation engine has revved up as banks prepare to structure and sell a spate of bonds backed by consumer loans before the Federal Reserve meets and Americans head to the polls in a historic election — two events that investors worry may unsettle markets.
Issuers, seeking to take advantage of the global search for yield as volatility remains muted, are readying a series of new collateralised loan obligations — the so-called structured products that are made up of bundles of riskier leveraged loans.
Carlson Capital, a Dallas-based alternative asset manager, priced a $404m CLO on Monday, and deals from BlackRock, Voya and Aegon are expected in the coming weeks, according to people familiar with the plans.
Sales of securitised products have been accelerating. In the week before an industry-wide conference in mid-September, new supply hit its highest weekly level since September 2014, according to data from S&P Global Ratings. Roughly $19bn of US structured bonds were sold in the week to September 16, including $13bn of securities backed by loans on cars, credit cards and other consumer products.
DriveTime, a used vehicle retailer, is marketing a bond backed by subprime auto loans this week.
“You are seeing a frenzy of issuance,” said Jason Merrill, a structured specialist at Penn Mutual Asset Management.
The Fed left interest rates unchanged when it met last week, and traders and investors now bet the US central bank will lift rates at its final meeting of 2016.
Investors in search of income have been attracted to asset-backed securities, which tend to offer higher yields than similarly rated corporate bonds. Despite heightened demand, the highest-rated tranches in recent CLO deals have yielded between 2.3 and 3 per cent, above the 2 per cent yield on the Barclays US aggregate bond index.
“The ABS market is on fire,” said James Shepard, co-head of investment grade debt capital markets at Mizuho. “Whatever upsets this market is unknowable. We point to the presidential election, but that is probably a bump in the road. Something that completely reverses things has yet to be determined.”
Managers of asset-backed securities, and in particular commercial mortgage-backed securities and CLOs, are also contending with incoming “risk retention” regulations. The new rules will force them to retain 5 per cent of the economic interest of each new deal they issue after December, prompting some to rush to complete transactions before the regulations come into force.
Several banks have increased their projections for CLO issuance this year, with most predicting between $50bn and $60bn will be sold by year’s end. So far, $43.5bn has been priced in 2016.
“It could become more difficult to issue in a couple of months around the election time and as the final stages of risk retention implementation go into effect at year-end,” said Darrell Wheeler, head of global structured finance research at S&P.