With structured finance markets largely moribund, some investors are taking a test drive in esoteric securitization markets backed by trains, planes and ships.
Securities backed by transportation assets and equipment leases varying from shipping containers to railcars and even executive jets may be set to climb, because some of these investment vehicles are more stable and offer greater investor protections than regular asset-backed securitization deals.
CNH Equipment Loan Trust priced a $753 million deal last week, attracting three times more demand than offered for some of its subordinated bonds, market sources said.
Deere & Co., truck maker Navistar International Corp. and TAL International Container Corp. priced similar ABS deals this year, helping to restart an exotic corner of the market that was still dormant a year ago in the wake of the global credit crash.
"There's a lot of interest. We'll probably beat last year's issuance," said Michael McDermitt, senior credit officer with Moody's Investors Service asset finance group in New York. "In a low yield environment, there's interest in how can I get higher yield, and esoterics is one way to generate marginally higher yield."
Structured finance markets were a roaring engine of growth leading up to the global credit crisis and also a source of tremendous risk that contributed to the credit crash. A new securitized market with safer and more transparent investment vehicles is seen by many market experts as a crucial step to returning to regularly functioning credit markets.
"This market may be one of the first to come back," McDermitt said. "I think it's showing this year that it is coming back."
Overall U.S. ABS issuance has fallen 27 percent year-to-date to about $78 billion, versus $106.5 billion for the same period last year, Thomson Reuters data showed. That compares to $1.25 trillion during the peak year in 2006.
The number of ABS deals backed by transportation assets, aircraft and equipment leases has doubled from last year, and volume has risen to $7.9 billion so far this year through August 9, with 14 issues priced. Some $5.4 billion was priced last year based on 7 issues, according to Thomson Reuters data. The record year for those securities was 2005, when $18.6 billion priced.
Esoteric ABS deals are attracting interest because they are backed by tangible assets, have reliable revenue streams and benefit from tax advantages because of depreciation.
Shipping rates also almost doubled over the last year, providing solid revenue streams. Another layer of protection shields investors because assets such as trucks, railcars and containers are tangible and hold intrinsic value, so in the event of a default, investors can repossess the asset.
"These investments are not pure securitization but rather structured finance transactions whose assets gave a solid lease revenue stream providing cash flow," said Todd Plotner, a partner with the Chicago law firm Chapman and Cutler LLP, which closed two ABS transportation deals this summer and has another deal in the works in September.
William Black, Moody's managing director for its asset finance group, sees a recovery in overall ABS issuance, particularly in the auto, student loans and esoteric markets, with the exception of the credit card market.
ABS markets are now starting to show signs of life after the steep fall from peak levels in 2006, after which massive defaults in subprime mortgages began to ravage structured bond markets, sparking similar declines for consumer loans and ABS structured products.
TAL International, one of the world's largest lessors of freight containers, announced in June its first container ABS deal since the global credit crisis struck. Its unit, TAL Advantage IV, completed a $197 million ABS deal that secured an A-rating by Standard & Poor's.
"We are very pleased with the successful offering," Brian Sondey, president and chief executive of TAL International, said at the time. "This transaction represents the first intermodal container ABS term financing since 2007, and the facility will become an important and cost-effective part of our long-term capital structure" to finance investment and growth in 2010.
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