NATIONWIDE: An Introduction to USA - Nationwide

Overview – Capital Markets – Securitization

The United States securitization market has continued to be very active over the last year. Issuers of registered asset-backed securities (ABS) have successfully adapted to the many additional regulatory requirements enacted in response to the financial crisis. Registered offerings of ABS have primarily consisted of ABS backed by automobile loans, automobile leases and commercial mortgage-backed securities. Registered offerings of residential mortgage-backed securities (RMBS) have continued to be nonexistent, primarily due to the difficulties related to compliance with the 2016 amendments to Regulation AB that required the provision of asset-level data. Other sectors of the ABS market, including securitizations of marketplace loans and single-family rental loans (SFR), have also chosen to pursue unregistered offerings. The scope of one of the primary regulatory responses to the financial crisis, the so-called “risk retention rules” which apply to both registered and unregistered offerings of ABS, was limited by the U.S. Court of Appeals for the D.C. Circuit in 2018. The Court held that Collateralized Loan Obligation managers were not “securitizers” and thus, were not subject to the risk retention rules. Although many CLO managers had adapted to the risk retention rules by employing a variety of structures to make compliance with those rules economically feasible, the ruling did result in CLOs which did not include such structures.

For 2018, the volume of securitization increased to the highest level since the financial crisis. Spreads did narrow throughout 2018 before widening out at the end of the year, together with spreads of other corporate debt products due to market volatility. There continue to be concerns over the underwriting standards for subprime auto loans as well as commercial mortgage loans. Below are specific observations on a few asset classes. Given the breadth of the asset classes in the ABS market, we have selected only a small number of the many possible asset classes.

Alternative Energy ABS. One of the faster growing areas in the ABS market is the securitization of alternative energy assets, typically loans and leases that are made to support renewable energy products like solar loans, energy efficiency washers, dryers and windows and similar products. Sponsors can be specialty finance companies or municipal agencies and entities, and lenders have included banks and government agencies. The warehouse and term transactions that have been done to date have been structured in similar fashion to consumer asset securitizations. Most of these transactions are private placements and do not have to comply with public offering asset-level disclosure requirements.

Auto ABS. Given the large number of issuers in the auto ABS sector that issue publicly registered ABS, this particular sector was significantly affected by the regulations enacted in the aftermath of the financial crisis. The industry has successfully adapted to the new regulations, including the asset-level data requirements in public transactions and risk retention. As noted above, concerns still remain over future loan performance, especially deeper subprime auto loans, given evidence of slowing automobile sales. However, in spite of these concerns, the vast majority of auto ABS are performing within expectations.

CLOs. CLO issuance was positively affected by the upturn in the leveraged loan market in 2018 before being negatively affected by the downturn in the leveraged loan market at the end of 2018. Consequently, the amount of issuance over the last two months of 2018 and early January 2019 declined from the heavy pace of issuance that was present earlier in 2018. The market remains concerned about the impact of recently proposed risk retention rules in Japan, which may impact certain Japanese banks that have been active purchasers of the “AAA” classes in many CLOs.

CMBS. The CMBS market is commonly divided into a large publicly-registered conduit component; a single asset / single borrower privately offered component; and a private floating rate component. Each of these sectors was strong throughout most of 2018. Those issuers that have compliant shelf registration statements remain active in the public market. Each market has largely resolved the issues inherent in the risk retention rules and has done a number of horizontal, vertical and L-shaped retention deals.

Marketplace Lending. Growth continued in marketplace lending securitization volume through the beginning of 2018, and then leveled off toward the end of the year and into 2019. The number of repeat issuers has reached a critical mass, making volumes more stable from quarter to quarter. The market now consists almost entirely of rated 144A private placements sponsored by the marketplace lending platforms, primarily in the consumer loan, student loan and small and medium enterprise (SME) loan sectors, many of which aggregate loans previously sold to third-party whole loan investors on their platforms. The marketplace lending platforms hold the risk retention on these securitizations. Several platforms are also offering pass-through whole loan certificates as an additional means to bring in third party whole loan investors who are unable to acquire whole loans directly. Increased attention is being paid to primary and backup servicing on these transactions as the prospect of a downward turn in the credit cycle looms, and there is a trend toward rated backup servicers. Certain court decisions and state regulatory challenges that call into question the bank partnership model used by many marketplace lending platforms continue to raise risks in this asset class. Marketplace lending platforms have implemented structural changes intended to distinguish their loans from those challenged by these court decisions and regulators, but these changes have yet to be tested in litigation or in a regulatory enforcement setting. The industry is working with legislators and regulators on legal solutions to some of these issues. The OCC FinTech charter and industrial loan company (ILC) charters present a possible alternative to the bank partnership model, but face challenges from community banking groups and certain state regulators.

RMBS. While whole loan sales of residential mortgage loans remain an attractive exit option, pricing for RMBS was extremely favorable for most of 2018, resulting in a marked increase in the issuance of RMBS of all types, including RMBS backed by newly originated loans (both QM and non-QM) and reperforming mortgage loans. Several new issuers of RMBS entered the market during 2018. Due to widening spreads at the end of 2018, the market slowed. However, most market commentators expect offerings to increase throughout 2019, especially offerings backed by non-QM mortgage loans.