ABS issuers halt deals in volatile market
Updated: Apr 6, 2022
A growing number of companies has suspended sales of their US dollar securitised debt in a challenging market where interest rates are rising and spreads have widened thanks to the Russia-Ukraine conflict.
Electric carmaker Tesla, fintech firm Affirm and auto lender World Omni Financial pulled their asset-backed bonds in recent days, while at least two CMBS deals – one backed by Deutsche Bank's New York City headquarters and one intended to fund Pimco's acquisition of Columbia Property Trust – were put on hold earlier this month.
The suspended deals come as weekly asset-backed issuance has swung wildly since Russia's invasion of Ukraine last month.
Issuers and investors struck a slew of deals two weeks ago when 16 transactions totalling US$12.34bn priced, marking the busiest week for the ABS sector so far in 2022, according to IFR data. However, that burst of supply proved unsustainable as issuers were reluctant to budge further on spreads which have already gapped out to their widest levels since early 2020, market participants said.
"Deals are getting done when [issuers] widen levels to compensate for overall macro-economic risks," said Daniel Lucey, senior portfolio manager at SLC Management. The wider spreads on well-structured issues from strong sponsors are providing attractive opportunities, he said.
Last week, only three issuers completed ABS deals through Thursday. Farm and construction equipment producer Kubota, business financing company Monroe Capital and timeshare operator Travel + Leisure raised a combined US$1.67bn.
"This is the hardest environment since the start of Covid when there was no issuance. [But] right now, there is still a market and there is still issuance," Toorak Capital Partners chief executive John Beacham said on Wednesday. The KKR-backed mortgage lender priced a US$264.4m residential bridge loan securitisation, Toorak Mortgage Trust 2022-1, on March 4.
In Affirm's case, an investor who had placed a sizeable order for the US$413.33m A note asked for a wider spread than previously discussed, a buyside source said. "Rather than adjust, the deal was just pulled," the source said.
"It sounded like they had the trade lined up and the levels moved. It was rotten timing," an ABS banker away from the deal said.
The yield on two-year Treasury notes hit 2% for the first time since May 2019 on Wednesday after the Fed raised key short-term rates by a quarter point to 0.25%–0.50% in a bid to curb inflation, which is running at a 40-year high. Central bank officials projected policy rates rising to 1.75% to 2.00% by year-end.
In light of the heightened levels of credit spread and interest rate volatility, "we made the decision to temporarily hold off on issuing this particular transaction at this time", an Affirm spokesperson said.
Affirm's postponement briefly hit its share price. The San Francisco-based "buy now pay later" company saw its shares plunge to an all-time low of US$26.02 on Monday when news of its pulled US$500m Affirm Asset Securitization Trust 2022-A circulated. The stock had retraced to US$36.62 by Thursday, close to where it was trading before the postponement of the ABS.
It is unclear when all these pulled issues will return, market participants said.
Eric Gebhard, treasurer for JM Family Enterprises, which is the parent of World Omni, said World Omni's deal would certainly be back. "The deal is being restructured to accommodate for the recent benchmark interest rate changes. Our expectation is that the deal will move forward at a later date," he said.