Banks are shedding assets and many of them are turning to a booming sector of the bond market to do so. The latest round of global capital standards, known as the Basel III endgame, is expected to make a range of loans more expensive for banks to maintain.
In response, lenders are bundling more auto loans, equipment leases and other types of debt into asset-backed securities. In the US alone, ABS sales have surpassed $170 billion this year, an increase of approximately 38% from this time in 2023, according to data compiled by Bloomberg News.
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Europe has seen similar gains: Issuance was about 21 billion euros ($22.9 billion) this year, up about 35% from the same point last year, according to data compiled by Bloomberg that excludes securities backed by mortgages.
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And the tide of broadcasting does not seem to abate. Bank of America strategists on May 31 raised their predictions for annual U.S. bond sales to about $310 billion from their previous $270 billion, primarily due to auto loan securitizations.
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The bonds are finding willing buyers among credit investors, with attendees at a global ABS conference in Barcelona this week expressing cautious optimism about the market.
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“We see attractive opportunities in asset-backed securities,” especially those tied to U.S. households, Kay Herr, chief investment officer of fixed income at JPMorgan Asset Management, said on the Credit Edge podcast, where he added that “we definitely see opportunities to increase performance there.”
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Banks’ use of significant risk transfers, which are cousins to ABS, is also driving issuance, which is at its fastest pace since the 2008 financial crisis hit the market. “Many of the SRT deals have been in the U.S. so far,” Andrew South, head of structured finance research at S&P Ratings, said at a conference this week.
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“With many regulatory changes on the side of Basel 3.1, There could be more incentives for banks to use securitization to relieve capital,” he added. One sign of the robust demand is that investors seeking securities with relatively strong ratings and high yields have increasingly purchased asset-backed securities. more exotic, including art by Rembrandt van Rijn and Andy Warhol, and Internet protocol addresses.
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“We are getting a lot of inquiries about exotic securitizations,” South said, citing securitization of data centers and solar panels as two examples. Notably, issuers could be bringing forward their sales to avoid any volatility from the US presidential election or a change in monetary policy from the Federal Reserve, according to the strategists. That dynamic could result in a much slower second half of the year.
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Wall Street CEOs have been vocal in their complaints about the Basel III endgame rules. Jamie Dimon of JPMorgan Chase & Co. said hedge funds and other firms outside the banking system were excited about the business they would get from the regulations. “They’re dancing in the streets,” Dimon said last year.
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It seems regulators are listening. In March, Federal Reserve Chair Jerome Powell said the central bank was planning “broad and material changes” to the implementation of the rules, and that a full review was possible. But still, banks’ preparations for the new, stricter capital rules are evident in the growth of ABS issuance.
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In recent days, lenders have lined up a slew of new deals for sale next week, including auto bonds from Santander and Toyota. Weekly Summary Private credit is experiencing what happens when things get bad. Higher interest rates are making many businesses struggle to pay off their debt, while cash-rich lenders are competing each other on prices and offering unusually favorable terms to borrowers.
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Some warn that it is laying the groundwork for more pain ahead. A group of investors in Credit Suisse Group AG bonds who were wiped out when UBS Group AG bailed out the bank in a deal brokered by the Swiss government are suing the country in New York as they take their fight abroad. Asian borrowers are returning with greater force to global debt markets, joining others around the world who are contributing to near-record levels of activity this year.
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Banks are increasing investments in a complex part of the mortgage bond market that offers shorter-term securities, while facing the increasing risk of losing deposits amid high rates.
By Bloomberg
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