DBRS Morningstar’s Takeaways from SFVegas 2022: Why Esoteric ABS is Worth a Look

As part of its takeaways series, DBRS Morningstar is publishing several write-ups about pertinent topics discussed at the SFVegas conference. DBRS Morningstar’s Stephanie Mah, Senior Vice President of Structured Finance Research, moderated a panel on nontraditional asset-backed securities (ABS), or esoteric ABS. The panelists all agreed this subsector of ABS presented opportunities for investors despite the uncertainty surrounding the macroeconomy. “Challenging times like these present the best opportunities in a way,” said Punit Dholakia, Vice President of Capital Markets at Pipe Technologies.

One reason for this is the esoteric ABS market is mostly commercial assets and has less exposure to consumers than other types of ABS, according to Cory Wishengrad, Head of Fixed Income at Guggenheim Securities. For example, whole business ABS typically securitizes franchise fees for quick-service restaurants, which tend to perform well in recessionary times, per Wishengrad. Data centers also are part of the esoteric ABS market, and they will still be in demand because of increasing mobile search and online activity.

In addition, esoteric ABS deals are trading on the secondary market with higher yields than before. Wishengrad said the top-tier names for whole business securitizations saw basis points increase to the low-200s as of July 15, 2022, versus the low-100s at YE2021. The second-tier names were up to the mid-high-300s from the 200 area over the same period. Data centers experienced similar spread widening. He also noted that the biggest story is how the interest rates on Treasury bonds are not only higher but also inverted, with rates on three-year bonds above those on 10-year bonds. The sudden rate movements can present an opportunity for esoteric asset classes that protect against inflation or are becoming part of the mainstream, such as music rights, according to Sreesha Vaman, Managing Director of Capital Markets at Empowerment IP.

With all new asset classes, data availability is an issue, though there have been improvements. Dholakia believes data are better organized, more readily available, and easier to comprehend compared with five to 10 years ago. “If an investor has a specific format that they require information to be available [in], that is something that technology companies can produce in fairly quick order.”

Kawa Capital Management’s Emile Ernandez, Managing Director, added “I’ve noticed that in recent years… investors are a lot more open to participating in sectors where data may be more limited.” With the rise of more esoteric categories, the marketplace can often rely on proxy data for similar, but not exact, sectors as the asset being securitized in circumstances where information is limited. He also noted how transaction structure can mitigate a lack of data. For example, turbo payment periods and performance triggers can provide investors with additional protections in circumstances where data may be lacking.

Last year, new issuance of esoteric ABS was about $4 billion a month, per Wishengrad, compared with the typical $20 billion to $25 billion a month for ABS overall. For 2022, new esoteric ABS issuance has been relatively robust, with utility receivables, small business loans, energy, insurance, and timeshares leading the charge. Issuance has been relatively more subdued in data center, aircraft, cell tower, and whole business securitizations.

Mah concluded the panel again highlighting the industry’s growth. “At first blush, some might dismiss esoteric ABS as a small nascent part of the market, but collectively [it’s] representing a larger and increasingly more important part.”

Written by Caitlin Veno

Notes:
All figures are in U.S. dollars unless otherwise noted.

For more information on esoteric ABS, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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