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COMMENTS

Global Structured Finance Issuance Volumes For Q1 Steady As China Growth Offsets Declines In Europe And U.S.


Global Structured Finance Issuance Volumes For Q1 Steady As China Growth Offsets Declines In Europe And U.S.

Global securitization issuance volume was roughly flat on a year-over-year (YOY) basis during the first quarter of 2019, as declines in Europe (down 40% YOY) and the U.S. (down 7%) were offset by strong growth in China (up 64%) and modest growth in Japan (up 17%). Meanwhile, Canada and Latin America were roughly flat YOY. S&P Global Ratings' forecast for total global issuance volume in 2019 remains at just over US$1 trillion. Our 2019 issuance projection for China experienced the largest revision, increasing to the $330-$340 billion range from $310 billion. In the U.S., our new issuance projection remained the same; we did revise our call for collateralized loan obligation (CLO) refinancings and resets down to $60 billion from $110 billion (see table 1).

Table 1

Global Securitization Issuances(i)
2019 forecast Q1 2019 Q1 2018 2018 2017 2016
U.S. (bil. US$)
ABS 245 60 69 239 229 191
CMBS 80 17 19 77 88 69
CLO 110 29 32 129 118 72
RMBS-related(ii) 100 22 18 86 70 34
Total U.S. new issue 535 129 139 531 505 366
U.S. CLO reset/refinance(iii) 60 9 32 156 167 39
Canada (bil. C$) 20 6 6 25 20 18
Europe (bil. €) 95 16 26 106 82 81
Asia-Pacific (bil. US$)
China 335 54 33 292 220 116
Japan 58 15 13 56 48 53
Australia 26 3 4 23 36 16
Latin America (bil. US$) 12 3 3 9 17 12
Total global new issuance (approx. bil. US$) 1,090 225 230 1,040 930 670
(i)As of March 31, 2019. (ii)RMBS-related includes prime, reperforming/nonperforming, rental bond, servicer advances, and risk-sharing deals. (iii)Not included in new issue total. ABS--Asset-backed securities. CMBS--Commercial mortgage-backed securities. CLO--Collateralized loan obligation. RMBS--Residential mortgage-backed securities. Sources: S&P Global Ratings, S&P Global Market Intelligence, Bloomberg, and Commercial Mortgage Alert.

U.S.

Partially offset by strong issuance in the private-label residential mortgage-backed securities (PL-RMBS) space, U.S. structured finance (SF) first-quarter 2019 new issuance came in at $129 billion, down 7% from $139 billion last year. Only PL-RMBS posted a YOY gain within the four major SF sectors (RMBS, asset-backed securities [ABS], CLO, and commercial mortgage-backed securities [CMBS]).

Making up nearly half of ABS issuance, auto ABS was up 13% YOY to $30 billion in first quarter. However, reduced issuance in non-traditional/esoteric ABS, commercial ABS (equipment, fleet lease, and floorplan), and other ABS subsectors, kept total first-quarter 2019 issuance under last year's figure. Non-traditional ABS declined by 45% from first-quarter 2018 (down $5 billion) and commercial ABS was down 18% (down $1.7 billion). Overall first-quarter 2019 ABS issuance came in at $60 billion, down 13% from $69 billion last year. Our full-year forecast remains at $240 billion.

CLO new issuance reached $29 billion in first-quarter 2019, down 9% from first-quarter 2018. CLO resets and refinancings continue to be much lower this year. They are currently at less than $10 billion, down 70% from first-quarter 2018, due to wider spreads beginning the year; furthermore, they are showing few signs of tightening back to levels that would spur more activity. We are lowering our 2019 projection for CLO resets and refinancings to $60 billion (from $110 billion previously), while keeping new issue projections at $110 billion.

CMBS new issue volume totaled $17 billion, down from $19 billion last year. Conduit issuance in first-quarter 2019 came in at about $9 billion, down $1 billion from the first quarter of last year; and non-conduits came in at $8 billion in first-quarter 2019, down almost $2 billion from last year's figure. (Note: We do not include commercial real estate CLOs in our CMBS totals.) We reiterate our $80 billion forecast, noting a recent pickup in activity, as well as a combination of lower rates and tightening spreads, which is generally supportive of origination volumes.

PL-RMBS issuance is having a strong year. Issuance was up 24% to $22 billion in first-quarter 2019. First-quarter 2019 non-qualified mortgage issuance is now over double last year's figure, coming in at over $5 billion. Our full year forecast remains at $100 billion.

Overall, conditions remain generally supportive for SF issuance, with moderate economic growth, low unemployment, and low rates/tightening spreads (CLOs have been the exception with regard to spreads). Absent an exogenous shock to the system, we are maintaining our $535 billion full-year forecast for new issuance volume.

Canada

Sanjay Narine, CFA, Toronto, (1) 416-507-2548; sanjay.narine@spglobal.com 

Piper Davis, New York, +1 (212) 438 1173; piper.davis@spglobal.com  

Canadian public term ABS (excluding covered bonds) issuance volumes in the first-quarter 2019 were down by 2% to C$6.3 billion compared to C$6.4 billion for the same period a year ago. Of the C$6.3 in ABS issuance, 85% were cross-border transactions. While credit card ABS volumes declined slightly to C$5.0 billion in first-quarter 2019 from C$5.2 billion in first-quarter of 2018, auto ABS almost doubled to C$1.3 billion from C$0.6 billion for the same period.

Cross-border credit card ABS issuance increased 74% to US$3.5 billion in first-quarter 2019 from US$2.0 billion a year earlier. Auto ABS cross-border transactions also increased, with issuance of US$0.6 billion for the first quarter of 2019, compared to no issuance for the same period in 2018.

We believe Canadian ABS issuance volume is on target to reach C$20.0 billion expected issuance by the end of the year, with cross-border transactions remaining strong.

Europe

Andrew South, London, (44) 20-7176-3712; andrew.south@spglobal.com 

The European securitization market got off to a slow start in 2019, with investor-placed issuance in the first quarter of 2019 down by nearly 40% YOY at only €16 billion. The Jan. 1, 2019, implementation of the EU's new Securitization Regulation has proved disruptive so far. Although the new rules are now in effect, some implementation details have not been fully signed off by policymakers. Lingering uncertainties over eligibility criteria for the new "simple, transparent, and standardized" (STS) label and details of updated disclosure requirements have pushed many originators to the sidelines until there is greater clarity.

CLOs have been the least affected sector, partly because STS eligibility was never on the table for these actively managed transactions. In addition, while a fallback clause in the new regulation has moved most securitization sectors to an interim disclosure regime that many originators are reluctant to implement (given it will be temporary), CLOs are not covered by these backup rules. The U.K. ABS and RMBS sectors have also held up relatively well in terms of volume, partly due to a large refinancing of some legacy mortgage collateral. However, Eurozone-backed securitization volumes are down by more than 75%.

That said, a handful of STS-certified transactions have now priced, despite the policymaking logjam. Other aspects of the infrastructure for the new regulatory framework--such as authorized certification agents for the STS label--are slowly being established, and this should increasingly help to unblock supply. On the other hand, the European Central Bank's recent announcement of a new round of long-term refinancing operations means Eurozone banks will have a new source of low-cost term funding available from September. Although detailed terms of the new scheme are not yet clear, it will likely dampen structured finance issuance if the economics are competitive for issuers.

Asia-Pacific

China

Aaron Lei, Hong Kong (852) 2533-3567; aaron.lei@spglobal.com 

Continuing the robust growth trend, China recorded RMB365 billion, or US$54.4 billion, of new securitization issuance in first-quarter 2019. This was 64% higher than the same period last year. The favorable interest rate environment encouraged securitization issuers to tap the market, while investors are actively taking securitization notes because of the stable performance and short durations. RMBS issuance is again leading in issuance volume, but it is the auto loan ABS and corporate receivables issuance that drove up the growth. Due to the strong issuance in the quarter and the strengthening RMB, we are raising our 2019 new issuance projection in China to US$330-340 billion from US$310 billion.

The concern regarding China's slowing economic growth and a China-U.S. trade dispute appear to have been abated compared to three months ago. Although the worry of more corporate defaults remains, the considerably easing interest rates and stabilizing equity markets do partly address the liquidity issues facing many corporates. However, vehicle sales continued to drop and there is no sign of significant improvement in corporate business operations. Asset performance in retail receivables was strong for the quarter, but we continue to see 2019 as a challenging year for some non-retail securitization transactions. The issuance amount in CLOs also reflected this concern because offerings of new CLO notes dropped by 17% from a year ago despite the impressive overall market growth.

Japan

Yuji Hashimoto, Tokyo, (81) 3-4550-8275; yuji.hashimoto@spglobal.com 

Issuance of securitizations in the Japanese SF market continued to gently rise in first-quarter 2019, recording growth of 17% YOY. Issuance in the first quarter of the year was worth about ¥1.63 trillion, compared with ¥1.40 trillion for the same three-month period in 2018. ABS and RMBS remain the main asset classes in the Japanese market, and ABS was the main driver for overall issuance growth in the quarter.

In March 2019, Japan's Financial Services Agency introduced a national version of risk retention rules, which affect regulatory capital requirements for investments in securitizations at certain types of Japanese financial institutions. However, we think issuance will remain on a similar pace to that seen in the first quarter, and that the risk retention rules' impact will be relatively limited for Japanese SF.

Australia

Erin Kitson, Melbourne, (61) 3 9631-2166; erin.kitson@spglobal.com 

New issuance for first-quarter 2019 was U.S. $3.48 billion, down 2% from 2018. RMBS issuance comprised the majority of the new deals but ABS issuance was not dormant, with one auto loan ABS transaction closed in the first quarter. We expect to see further issuance from this sector in the coming quarters as strong investor demand continues to build, supported by ABS' short tenor and the strong build up in credit support that it has exhibited historically. Across RMBS, non-banks continue to dominate the new issuance activity in terms of the number of transactions as they seek to capitalize on lending opportunities created by banks retreating from certain lending segments. In the wake of the Royal Commission's release of its final recommendations, this trend is likely to continue. Strong demand from Japanese investors for Australian RMBS will help sustain new issuance momentum in coming quarters, in our opinion.

Although tightened lending conditions continue to influence credit growth and property prices, stable employment conditions and low interest rates are keeping asset performance stable. While loans more than 90 days in arrears have continued to rise, they are rising from low levels; they are currently around 0.75%. Arrears and prepayment rates may experience some further deterioration as economic conditions soften, but we expect ratings performance to remain stable, given the credit support available in many transactions and strong collateral performance.

Latin America

Jose Coballasi, Mexico City, (52) 55-5081-4414; jose.coballasi@spglobal.com 

We expect Latin American new issuance volume to increase modestly, driven primarily by a rebound in Brazilian traditional securitization, RMBS, and covered bonds. Latin American financial technology companies' funding needs and infrastructure-related certificate repacks in frontier markets across the region could also bring securitization opportunities. Meanwhile, we expect domestic issuance in Argentina and Mexico to remain flat. We no longer expect issuance related to public-private partnerships (PPPs) in Argentina this year, because we believe the current government is focused primarily on the election, and economic conditions still jeopardize the fundamentals behind this type of deal. This brings our 2019 issuance expectation for the region to US$11-$13 billion, down from US$18.0 billion.

This report does not constitute a rating action.

Global SF Research:James M Manzi, CFA, Washington D.C. (1) 434-529-2858;
james.manzi@spglobal.com
Tom Schopflocher, New York (1) 212-438-6722;
tom.schopflocher@spglobal.com
Secondary Contact:Travis Erb, Centennial + 1 (303) 721 4829;
travis.erb@spglobal.com

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