Lending markets

Exotic bond issuers flee to private markets as uncertainty swirls

(Bloomberg) – Companies that issue exotic bonds are struggling to close deals as macroeconomic uncertainty rises and investors seek refuge in vanilla deals. They are therefore turning to a more traditional ally: private debt.

Borrowers in the esoteric ABS market are repackaging unusual assets into securities – ranging from royalties to airplanes and shipping containers – as opposed to conventional debts like credit cards or car loans.

However, a bleak macro outlook pushed ABS investors toward interim deals, putting esoteric borrowers in a bind. Non-traditional ABS issuance has fallen to $2.27 billion so far this year, from $56.18 billion at this point in 2021, according to data compiled by Bloomberg. This is just over 4% of last year’s volume.

This means that most esoteric borrowers sought out private partnerships instead. “In public markets, there is a lack of certainty around prices,” Yezdan Badrakhan, head of esoteric ABS at MUFG, said in an interview. “Bank-led deals provide that certainty.”

Investment banks were reportedly quick to step in, offering issuers bridge financing, term loans or increases in warehousing facilities to offset the risk aversion sentiment in public markets. Separately, the borrowers are also pursuing bilateral deals, such as private placements with investors with whom they already have a relationship, according to market participants.

Meanwhile, traditional and non-traditional issuers who have successfully closed deals conventionally have seen spreads widen as the market priced in uncertainty. In May, a debt-backed commercial mortgage bond transaction linked to the Las Vegas Cosmopolitan depreciated 100 basis points on the lower tranches.

Soaring borrowing costs due to rising rates and investors demanding better terms have deterred firms in the esoteric ABS subsector from offering more deals to the market. In June, Carlyle Aviation Partners paid a 6% coupon on the sole tranche of its approximately $522 million aircraft contract, about double what it had paid for a similar contract in November, where the coupon was 2.95% on the largest tranche. The bond was secured by leases with companies such as InterGlobe Aviation Limited, Spirit Airlines Inc., Air Canada and Avianca.

Slower book building only exacerbates the situation. “One of the worst things that can happen to an investor in a deal is getting approval from the investment committee to make a deal that ultimately fails due to a lack of demand,” said Rich Barnett, a partner leading the capital markets team of Castlelake LP. , in an interview.

In contrast, private market lenders can avoid tedious rounds and agree directly with issuers on terms that won’t change with market fluctuations.

For esoteric issuers, tapping banklines is also a way for companies to prove to investors that they’re in it for the long haul. “We think one of the reasons they’re going to private markets is to show investors that they’re a survivor and still have access to capital,” Barnett said.

From the banks’ perspective, this change is also an opportunity to strengthen relationships, Badrakhan said.

Still, the momentum is unlikely to last. “They will return to structured markets,” Badrakhan said. “They’re not totally moving away from it, but the amount of capital going into private transactions or bank lines is palpable.”

Relative value: ABS

  • BofA analysts say asset-backed assets look cheap relative to short-term companies, as the basis between the ICE 1-5 Year AAA-A Corporate Index and the 1+ Year AAA-A Index US Fixed Rate ABS Index remains well above the 2-year pre-pandemic average
  • Within the asset class, the bank favors equipment ABS over investment-grade auto loan bonds, analysts wrote in their weekly note.
  • Private student loan ABS also looks attractive compared to FFELP ABS, they said

Quotable

“If CLOs begin to significantly underperform the rest of the credit universe, we are prepared to step in as a liquidity provider and increase our allocation, likely alongside an overall increase in gross exposure” , LibreMax Capital co-founder Greg Lippmann wrote in a note. seen by Bloomberg.

And after

ABS transactions in the queue include Toyota (Prime Auto Loan ABS), Amherst Residential (Single Family Rental ABS), Hipgnosis (Music Royalty ABS), American Express (Credit Card ABS) and GM Financial (top-notch car rental ABS).

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