Asset securitisation: Trillions of assets to package
The market for asset-backed securities could make the corporate bond market look like a minnow – there are trillions at stake. Peter Lee assesses the bond-boggling numbers.
Make no mistake, asset-backed securities will be one of the boom markets of the 1990s.
The potential for further growth in the market is staggering. Even in the most developed sector, the US mortgage-backed market, there is considerable scope. To date, some $800 billion of mortgage-backed issues have been launched in the US. The total US mortgage market is around $2.3 trillion. There have been $86.6 billion of issues securitised against motor car loans, credit card receivables and other non-mortgage assets. The total pool of such assets in the US is $476 billion (according to figures from Salomon Brothers).
In the UK, £5.4 billion of mortgages have been securitised, a fraction of the available pool of £200 billion. And none of the possible £14.1 billion of credit card and motor car loans have been securitised. The cumulative total of non-US asset backed issues so far rated by Standard & Poor’s is only $10 billion, up from $3.2 billion in 1987.
And the argument for asset-backeds fulfilling that potential is compelling. Investors are wary of event risk on corporate debt; securities backed by a pool of assets carry negligible event risk. Intermediaries are learning to construct financings targeted to investors’, rather than borrowers’, demands. Asset-backed securities have the flexibility to satisfy exactly investors’ maturity, risk/reward and, currency requirements. And banks are keen to develop the market, as it will allow them to take assets off their balance sheets and so ease the burden of new capital adequacy requirements.
Securitisation of mortgages and other assets is no longer just a US phenomenon either. In the UK mortgage-backed securities have been pioneered not by banks but by specialist lenders, such as the Household Mortgage Corp, and the building societies. But, in February, the Bank of England ruled that banks’ assigned loans would be regarded as transferred – in other words, removed from the balance sheet and no longer subject to 50% capital weighting.
Late last year, securitisation became lawful in France. In Japan, the ministry of finance is studying the possibility of allowing banks to securitise domestic assets. In Canada, Australia and New Zealand mortgage-backed securities have been issued in the domestic markets.
As the BIS capital guidelines come into force all banks will become more eager to securitise non-mortgage assets, which are subject to full weighting. In the US, motor car loans and credit card receivables are still the most popular candidates for securitisation. But there are plenty of other possibilities, motor car leases, mobile home loans, boat loans, corporate bonds, junk bonds and municipal equipment leases.
Last October, Mellon Bank managed to sell $513 million of securities backed by non-performing loans.
In January 1989, Citibank launched into the Euromarket the first issue of securities backed by credit card receivables originated in the US. "Two years ago that would not have worked," says one of the Citibank executives in London who sold the issue. There was a degree of resistance because we used a vehicle name and Europe is a name recognition market. But we sold the issue."
Since then, Citicorp has led a $75 million international tranche of a $845 million global issue of credit card receivable-backed securities, which unlike previous deals, carried no credit enhancement.
The issue achieved a triple A rating for its maintenance through the addition of a subordinated tranche of notes. The deal, which was lead managed in the US by Goldman Sachs – commercial banks cannot lead asset-backed deals there yet – comprises a conventional $752 million tranche of five-year bonds paying 10%. They are backed by Citibank credit card accounts which pay roughly 22%.
There is a further $93 million B tranche, subordinated and rated single A, which provides a buffer to add security to repayment of interest and principal on the A notes. The bank pays a higher coupon on the B tranche, which was privately placed, but this is cheaper than a credit enhancement.
There are other signs of growing sophistication outside the US. United Mortgage Corp in the UK has established an asset-backed commercial paper programme. Traditionally, mortgage-backed issues had been restricted to sterling floating rate notes. "By appealing to new investors, we hope to open up a new funding alternative to medium- and long-term bond issuers, which certain investors are wary of because of the possibility of early prepayment of mortgages," says the issuer.
But could asset-backed securities be extended to non-financial corporate borrowers? Investment bankers in New York and London are hard at work on this one. Asset securitisation depends upon predictable cash flows. Companies which take regular payments on long-term contracts might be able to securitise a portfolio of such receivables and launch issues less tainted with event risk than standard corporate debt.