Global securitization issuance volume for the first half of 2020, at roughly $420 billion equivalent, was down 20% by just over $100 billion from approximately $525 billion during the same period one year ago. China, Japan, and Latin America were relatively flat, while the U.S. (-30%), Europe (-25%), Canada (-28%), and Australia (-42%) all experienced considerable declines. Our issuance forecast for 2020, which in January was over $1.1 trillion, has been trimmed by about 25%, and stands at $830 billion. The impact of COVID-19 on global macroeconomic growth and the knock-on effects on market sentiment, interest rates, credit, etc. remain the key factors for the second half.
|Global Securitization Issuance|
|As of June 30, 2020|
|2020 Forecast (Updated)||2020 Forecast (Original)||H1 2020||H1 2019||2019||2018||2017||2016|
|U.S. (bil. US$)*||370||560||201||289||582||540||505||366|
|Canada (bil. C$)||17||21||9||12||19||25||20||18|
|Europe (bil. €)||65||100||32||42||102||107||82||81|
|Asia-Pacific (bil. US$)|
|Latin America (bil. US$)||14||15||5||5||13||9||17||12|
|Total global new issuance (approx. bil. US$)||830||1,120||420||525||1,150||1,050||930||670|
(This article focuses on securitization issuance volumes; for a more detailed view on securitization credit, see the relevant section in "Global Credit Conditions: The Shape Of Recovery: Uneven, Unequal, Uncharted," July 1, 2020, and "COVID-19 Is Testing The Resilience Of Global Structured Finance," May 18, 2020.)
U.S. Structured Finance (SF) issuance was $201 billion in the first half of the year, down by just over 30% on a year-over-year (y/y) basis, and representing the lowest first-half total since 2016. By quarter, the breakdown was roughly $125 billion in Q1 and just $76 billion in Q2, reflecting the effect of COVID-19 on the broader economy and the fallout for structured finance (and the underlying loans') credit conditions/liquidity, spreads, etc. The outlook continues somewhat murky in the U.S., and we project some $370 billion in full-year issuance--about two-thirds of our initial forecast in January. That's roughly equivalent to the aforementioned 2016 total, and about halfway between this cycle's high (2019: $582 billion) and low (2010: $155 billion) prints.
By sector, ABS issuance totaled $86 billion (down a little over one-third y/y). Auto loan/lease accounted for more than half, at nearly $50 billion. The credit card sector was quiet, at just over $2 billion, as was personal loan ABS, at just over $3 billion. Student loan issuance was moderately active, posting over $8 billion, while commercial ABS (equipment, fleet, and dealer floorplan) accounted for $10 billion. The remainder was a mobile phone/device payment plan agreement offering for $1.6 billion. We expect about $170 billion for full-year 2020 ABS issuance, with over half backed by auto loan and lease receivables.
Collateralized loan obligations
CLOs were one of the more active asset classes in recent months, but volume still remains down on a y/y basis. More recent offerings continue to feature reinvestment periods between one and three years in duration, with a couple of static deals here and there. The year-to-date new-issue total in the first half was $35 billion, down by roughly 46% against a tough first-half 2019 comparison ($65 billion). We forecast $60 billion for new issuance in 2020.
Commercial mortgage-backed securities
CMBS issuance ticked down in June, with just over $2 billion in three conduits, compared to over $4 billion in various forms in May. The year-to-date total of $28 billion is off about 28% y/y, and we project $40 billion-$50 billion for the full year.
Residential mortgage-backed securities
RMBS issuance was $51 billion at the end of June, only down 7% from last year, making RMBS the best performer of the four major sectors in terms of y/y comparisons. We project $90 billion-$100 billion in 2020.
COVID-19 and the resulting market dislocation, evidenced by spread volatility, negatively affected Canadian ABS issuance--particularly cross-border issuance into the U.S. ABS market.
Public term ABS (excluding covered bonds) issuance volumes in the first half of 2020 were down by 28% to C$8.9 billion, compared with C$12.3 billion for the same period a year ago. Of the C$8.9 in ABS issuance, $4.7 billion (or 53%) are residential mortgage-backed securities, a positive development for the private-label RMBS sector. Credit card and unsecured ABS volumes declined to C$1.8 billion from C$6.4 billion in the first half of 2020. Auto and equipment ABS also declined to C$1.3 billion, compared with $4.3 billion in the first half of 2019.
European investor-placed securitization issuance now looks set to end the year substantially lower than in 2019, at about €60 billion-€70 billion. While market disruption caused by the COVID-19 pandemic pushed volumes down by about 25% y/y in the first half of 2020, this is a flattering basis to compare recent activity, given that issuance in early 2019 was artificially suppressed by uncertainties surrounding implementation of the EU's Securitization Regulation.
At the start of this year, the approaching maturity of some originators' borrowings from official sector funding schemes promised to spur growth in bank-originated securitization in the U.K., and there was some evidence of an uptick in the first quarter. However, both the Bank of England's and the European Central Bank's subsequent responses to the public health emergency have included renewed large-scale provision of cheap term funding for banks, which is likely to stifle bank-originated securitization supply once again. At the same time, issuance in the largest non-bank sector--leveraged loan CLOs--dwindled by nearly 35% y/y in the first half of 2020.
The CLO sector is also a focus in terms of credit performance. The macroeconomic shock from government-imposed lockdown measures across the world has exacerbated the decline in credit quality that had already been evident for CLO collateral pools. For example, the proportion of underlying European CLO exposures that S&P Global Ratings rates in the 'CCC' category has risen to more than 8% from about 2% in March. In consumer-backed sectors, such as RMBS and consumer ABS, the uptake of borrower payment holidays has not put significant pressure on transactions, where external liquidity provision is typically sufficient to cover many periods of bond coupon payments.
New securitization issuance in China fell by 2.5% in the first-half 2020 from the same period last year, and is now at RMB928 billion. The drop can be largely attributed to the lackluster issuance from banks and originators regulated by the China Banking And Insurance Regulatory Commission (i.e., transactions issued under the credit assets securitization scheme).
Weak RMBS issuance momentum has persisted since the second half of 2019, with only nine transactions issued in the first half of this year (versus 25 in the first half of 2019). Auto loan ABS issuance remains strong, with growth of 24% y/y, and the number of transactions (20 deals) issued surpasses that of 2019. Consumer and corporate loan ABS declined in the face of weaker consumption capacity and lower industrial activity. The more noticeable drop started from Q2 2020 as the COVID-19 impact became more apparent. So far no credit card ABS was issued this year.
We downwardly revised our new-issuance projection to drop by 10%-15% in 2020 y/y (our previous forecast was for flat new issuance), mainly due to weak RMBS issuance momentum. The broad consumer finance sector is also likely to remain soft throughout 2020.
Total issuance in Japanese structured finance as of the end of the second quarter of 2020 was almost in line with that of the same period last year. However, we think the 2020 issuance amount is likely to decline slightly y/y. The Japanese government announced a state of emergency in April due to the COVID-19 pandemic. After that, the total amount issued in the April to June quarter declined about 20% from a year earlier. This counterbalanced the increase of issuance in the first quarter. Although the state of emergency was lifted in May, the pandemic situation remains fluid. Measures to contain the virus burden the Japanese economy; total issuance is therefore likely to decline in 2020.
Despite the pandemic and its consequences, we expect ratings to be generally stable in Japanese structured finance for the year. We expect a deterioration in GDP and employment in 2020, which we consider negative for the performance of the loans underlying Japanese securitizations. We believe that lower-rated tranches are generally more vulnerable to economic stress. However, more than 90% of Japanese structured finance transactions are rated 'AAA' and there was only one non-investment-grade tranche outstanding as of the end of the second quarter.
Structured finance new issuance was down 42% y/y as of May 2020, decreasing to $5.9 billion from $10.3 billion. The largest declines were in the RMBS sector, the major asset class in Australia, where new issuance dropped by 45% compared with the same period last year. ABS issuance was less affected, with new issuance down by only 12% y/y. Heightened uncertainty around the duration and economic impact of COVID-19 at the onset of the pandemic resulted in a sudden halt to new issuance activity in April. Since then, issuance has gradually picked up, due in part to support provided by the Australian Office Of Financial Management's (AOFM) $AUD15 billion Structured Finance Support Fund (SSFS). This fund can invest in wholesale funding markets used by small authorized deposit-taking institutions (ADIs) and non-ADI lenders. The purpose of the program is to provide support primarily to the non-ADI market to complement the Reserve Bank Of Australia's (RBA) Term Funding Facility (TFF).
New issuance in this COVID-19 period has, for the most part, been from non-bank (non-ADI) originators. Banks have instead been utilizing the RBA's TFF or their inflow of deposits to fund new lending. While new issuance from banks has dropped off, there has been increased utilization of banks' internal self-securitization programs to fund loans, resulting in an overall increase in total loan balances outstanding in Australian RMBS trusts over recent months.
Investor interest appears to be returning, with spreads starting to come back in and anecdotal evidence of investors slowly gravitating back to mezzanine notes. Offshore investor interest in Australian RMBS has also remained relatively resilient given the relative value of this asset class and its strong performance history, but participation may be constrained by cross-currency economics over the short term.
We expect non-banks to continue to dominate new issuance in the second half of 2020, as banks are expected to continue to utilize the TFF and deposit inflows to fulfil their funding requirements.
Total structured finance issuance in Latin America was about $5.0 billion in the first half of 2020. The COVID-19 outbreak put most new issuance in the region on hold during the second quarter. As economic activity resumes across LatAm, we expect new securitization issuance to follow. Our new-issuance forecast is now in the $13 billion-$15 billion range, essentially flat with our projection at the beginning of the year, before the onset of the pandemic. As we previously expected, Brazil will drive issuance in LatAm for the rest of the year. The region's trending assets remain corporate repacks (mainly certificates of agribusiness receivables or real estate receivables in Brazil; "CRAs" and "CRIs"), securitizations of loans originated by fintech companies in Brazil, and CMBS and equipment loans and leases in Mexico. Elsewhere in the region, consumer credit in Argentina and repacks in the cross-border market should continue.
This report does not constitute a rating action.
|Credit Analysts:||Jose Coballasi, Mexico City (52) 55-5081-4414;|
|Jerry Fang, Hong Kong (852) 2533-3518;|
|Yuji Hashimoto, Tokyo (81) 3-4550-8275;|
|Erin Kitson, Melbourne (61) 3-9631-2166;|
|Sanjay Narine, CFA, Toronto + 1 (416) 507 2548;|
|Andrew H South, London (44) 20-7176-3712;|
|Research:||James M Manzi, CFA, Washington D.C. (1) 434-529-2858;|
|Tom Schopflocher, New York (1) 212-438-6722;|
|Brenden J Kugle, Centennial + 1 (303) 721 4619;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.