The asset-backed securities (ABS) market has proven to be remarkably resilient in the months following the initial COVID-19 crisis. CFOs may be familiar with traditional ABS asset classes like credit cards, student debt, and auto loans and rentals. But there is a subset of the ABS industry – “esoteric ABS” – that offers executives with unique asset classes non-recourse financing at relatively low interest rates.
This market includes everything from solar consumer loans and 5G spectrum licenses to rental car fleets and cargo planes. It often offers companies their cheapest financing solutions. Any business with strong cash assets, regardless of its balance sheet or credit profile, should be able to access the market at premium prices.
The esoteric ABS market has come a long way since David Bowie hired an insurance company to raise $ 55 million in royalties from his music catalog in 1997.
This article explores three issuers that entered the esoteric ABS market before and after COVID.
Recovering from problems in aviation ABS
Global Jet Capital is one of the main financiers and lessors of business jets. In June 2019, Global Jet issued its third ABS transaction. The $ 417 million senior bond rated “A” priced at 4.25%, about 230 basis points above the benchmark swap rate at the time.
The company was the first to test the post-COVID environment for aviation risk in October 2020. With more than 30 accounts having placed orders, the senior bond traded at 3.00% or 265 basis points compared to benchmark rates.
By March 2021 – and with more than 15 new capital providers buying bonds, new issue spreads for its senior tranche had fallen to 155 basis points (2.16% all-in coupon) – well below the levels of ‘before COVID (when benchmark rates were significantly higher). Global Jet’s customer base has proven to be remarkably resilient in 2020, and capital markets have taken notice.
Solar rebound ABS
Sunnova Energy is one of the country’s largest financiers in home solar storage solutions and batteries. Sunnova is an engaged user of ABS financing and has raised over $ 1.6 billion in solar ABS since 2017.
In June 2019, before the market imposed a COVID risk premium, Sunnova issued its senior debt tranche at 3.75% or 190bp against benchmark rates. A June 2020 deal priced at 260 basis points over benchmark rates, or 3.00% all-in. But a February 2021 deal came out at 120 basis points on swaps (1.80% all-in).
In just over six months, credit spreads have more than halved, erasing any COVID risk premium. This helped Sunnova, like many retail solar financiers, to see its lending performance remain strong in 2020 as more of its clientele worked from home. Sunnova showed how quickly debt markets rebounded as US homeowners continued to pay off their solar loans on time.
Litigation Finance ABS Yields
Finally, we are witnessing a resurgence of liquidity even with “niche” balance sheet assets such as litigation financing. Oasis Financial is one of the nation’s leading lenders to crime victims. It grants loans to litigants and their medical providers. Oasis issued its first securitization in February 2020, another at the height of the COVID crisis in June, and again in February 2021. It provided a succinct summary of the capital market’s appetite for esoteric ABS during the pandemic.
Its first “single-A” bond rated $ 122 million was issued with a spread of 225 on swaps, or 3.85% all-in. Four months later, the company paid a 400 basis point spread on swaps (4.25% all-in) to clear a much smaller $ 68 million bond. By February 2021, however, that COVID bounty had all but disappeared. With benchmark rates still low, the company issued a bond of $ 112 million at 2.60% all-in or a 240 basis point spread from benchmark rates.
The COVID-19 pandemic has presented enormous challenges to the market as a whole. For a few weeks at the start of the COVID crisis, the show practically came to a halt. With the Fed’s rate cut to offset economic dislocation, strong performance from underlying asset classes, and esoteric disaster-proof ABS bond structures, capital markets have made a comeback. Although investors initially demanded a premium, these spreads quickly narrowed.
The resilience of the ABS market, particularly with respect to “esoteric” or “out of the race” asset classes, can be a boon to private issuers. If a borrower has assets with a history of stable cash flow and a balance sheet not suited to a corporate revolver or traditional term debt, or if a company is looking to diversify its sources of cash, that borrower should consider this corner. of US capital markets. The esoteric ABS market is very open for business.
Fouad S. Onbargi is responsible for structured finance and assets at EA Markets.
Spreads and benchmarks for returns throughout this presentation have been provided by FinSights and Bloomberg.