October Consumer ABS Market Update

Monthly Commentary

November 03, 2017

Primary

October marked somewhat of a milestone as total ABS new issuance approached nearly $200bn for the year, a level that hasn’t been reached since before the great recession. ABS issuance currently stands at $193.7bn year to date, according to JP Morgan research. Nearly $30bn was issued in October alone easily surpassing any month in recent years. Of the nearly $30bn brought to the market during the month, roughly $6.8bn came in specialized ABS across consumer unsecured, timeshare, solar, and insurance premium ABS as investors continue to search for yield. Auto related ABS issuance is still the largest sector in 2017 at 42% followed by Credit Cards at 24%, Specialized ABS at 18%, and Equipment and Student Loan ABS comprise 5% and 6%, respectively. Among the deals of note were:

  • Verizon Owner Trust (VZOT) priced a $1,419mm cellular device payment plan transaction on October 11, 2017 at 25bps over swaps for the 2.48 year year AAA rated bond to 65bps over swaps for the 3.18 year single-A rated bonds. The bonds are securitized by a revolving pool of 24-month, device payment plan agreements originated by subsidiaries of Verizon Wireless. This was the third series issued this year and all tranches priced inside of guidance and upsized on strong demand.
  • American Express Credit Account Master Trust (AMXCA) priced $3.177bn in Credit Card ABS across three transactions on October 23, 2017 at 12bps over one-month LIBOR for the 1.96 year AAA rated bond to 48bps over swaps for the 4.96 year split rated (AA+/A+) rated subordinate bonds. The sponsor, American Express also issued another $3.65bn in senior unsecured bonds on the same day bringing the total to $6.83bn.
  • Mosaic Solar Loans LLC (MSAIC) priced a solar loan transaction on October 17, 2017. The $307mn transaction priced at 185bps over swaps for the single-A rated, 4.40 year notes and 9.75% yield for the BB+ rated 1.92 year notes. The deal was oversubscribed and priced anywhere from 25bps to 225bps tighter than initial guidance on strong demand.

Secondary

Secondary ABS spreads rallied across nearly all sectors in October even with the deluge of new issue volume. Benchmark high quality, consumer ABS traded anywhere from 1-5 basis points tighter while consumer ABS subordinate bonds and specialized ABS traded anywhere from 10-20 basis points tighter during the course of the month. Structured settlement seniors traded in the high 90s over swaps while FFELP Student Loan, Subprime Auto, and Consumer Unsecured ABS saw their spreads tighten in October. Bonds have become increasingly difficult to source and secondary auctions are generally trading through initial expectations.

Market News

Navient buys Earnest – On October 4, 2017, Navient Corp. announced it would acquire the financial technology start up Earnest for $155mm in cash with an expectation to close the transaction in the fourth quarter of 2017 according to the press release. The company focuses on refinancing student loans and plans to continue to operate as a distinct brand led by Earnest’s cofounders, Louis Beryl and Ben Hutchinson. Earnest was founded in 2013.

Payday lending rules get finalized by the CFPB – On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) finalized rules requiring payday, auto title, and deposit advance lenders to determine beforehand whether or not borrowers can in fact afford to repay their loans. The federal agency’s new rule centers around a “full-payment test” where lenders must determine if the borrower can make loan payments and still cover standard living expenses along with other financial obligations during and after the loan. The director of the CFPB, Richard Cordray stated the change, “Puts a stop to the payday debt traps that have plagued communities across the country. Too often, borrowers who need quick cash end up trapped in loans they can’t afford. “

Credit Card Performance – Bank of America Merrill Lynch’s Credit Card ABS index showed charge-offs rose 13 basis points month over month and 24 basis points year over year to 2.25% for September. The charge-off rate for the index surpassed 10% coming out of the financial crisis. Payment rate and yield increased on a year over year basis to 27.59% and 18.88%, respectively.

Bank of America Merrill Lynch Global Research Bank Card Index

Source: Bank of America Merrill Lynch Research

Spreads

Source: JP Morgan Research

 

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