The asset-backed securities (ABS) market continues to evolve. The ABS market began in the mid-1980s with securitizations of auto loans and credit card receivables. While issuance remains robust for traditional sectors such as credit cards, auto loans and student loans, we are seeing a shift in nontraditional ABS securitizations. Esoteric ABS consists of a broad range of asset types, including franchise or whole business, cell towers, timeshare, solar and unsecured consumer loans, among others.
In recent years, demand for nontraditional ABS has been bolstered by investor appetite for additional yield in a declining interest-rate environment. There has been growing investor acceptance of new ABS issuers and new collateral types. New issue volumes have been pushed up by falling interest rates as the investor base for this market continues to grow. Primary securitization deals have been met with strong demand as deals are often heavily oversubscribed. Esoteric ABS can offer additional portfolio diversification backed by a variety of assets.
Most ABS sectors have fared reasonably well, with stable collateral performance in light of pandemic-induced stress. ABS has historically offered a high degree of liquidity and a low history of defaults. Data from the Federal Reserve indicates that consumers continue to weather the stress of the COVID-19 pandemic with little deterioration on borrower credit records. Favorable credit metrics are likely a result of accommodations received from the 2020 CARES Act, along with fiscal stimulus measures provided by the federal government. These developments have boosted household disposable income, which has kept consumer delinquency rates relatively low.
While some smaller sectors within esoteric ABS may not enjoy the same liquidity as auto or credit card loans, ample opportunities exist for investors willing to put in the credit work and pick up incremental spread and yield over similarly rated debt securities. Most subsectors of the ABS market have largely recovered from the lows of 2020. However, some esoteric ABS spreads remain wide relative to other asset classes. Low delinquency rates and a recovering economy should benefit off-the-run asset types with consistent demand from investors seeking additional yield. ABS securities are typically shorter in duration, which can act as a hedge to rising interest rates. Security selection is key to driving outperformance in esoteric ABS, which can exhibit more idiosyncratic risk.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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