The asset-backed securities (ABS) market has proven remarkably resilient in the months following the initial COVID-19 crisis. CFOs may be aware of traditional ABS asset classes like credit cards, student debt, and auto loans and leases. But there is a subset of the ABS sector — “esoteric ABS” — which offers corporate managers with unique asset classes non-recourse financing at comparatively low interest rates.
This market includes everything from solar consumer loans and 5G spectrum licenses to rental car fleets and aircraft freighters. It often provides companies with their lowest-cost financing solutions. Any company with strong cash-flowing assets, regardless of balance sheet or credit profile, should be able to access the market at investment-grade pricing.
The esoteric ABS market has come a long way since David Bowie tapped an insurance company to raise $55 million against his music catalog’s royalty flows in 1997.
This piece explores three issuers who have accessed the esoteric ABS marketplace pre- and post-COVID.
Global Jet Capital is a leading financier and lessor of corporate business aircraft. In June 2019, Global Jet issued its third ABS transaction. The $417 million “A” rated senior bond priced at 4.25% — or roughly 230 basis points over the benchmark swap rate at the time.
The company was the first to test the post-COVID environment for aviation risk in October 2020. With more than 30 accounts placing orders, the senior bond priced at 3.00% or 265 bps over benchmark rates.
By March 2021 — and with more than 15 new capital providers buying bonds, new issue spreads for its senior tranche had fallen to 155 bps (2.16% all-in coupon) — well inside pre-COVID levels (when benchmark rates were significantly higher). Global Jet’s customer base proved remarkably resilient in 2020, and the capital markets took notice.
Sunnova Energy is one of the country’s largest financiers of home solar and battery storage solutions. Sunnova is a committed user of ABS financing and has raised more than $1.6 billion in solar ABS since 2017.
In June 2019, before the market imposed any COVID risk premium, Sunnova issued its senior debt tranche at 3.75% or 190 bps over benchmark rates. A June 2020 deal priced at 260 bps over benchmark rates, or 3.00% all-in. But a February 2021 deal came out at 120 bps over swaps (1.80% all-in).
In just over six months, credit spreads more than halved — erasing any COVID risk premium. It helped that Sunnova, like many retail solar financiers, saw its loan performance stay strong in 2020 as more and more of its customer base worked from home. Sunnova showed just how fast the debt markets rebounded as U.S. homeowners continued to pay their solar loans on time.
Finally, we see the resurgence of liquidity even with “niche” balance sheet assets like litigation finance. Oasis Financial is one of the country’s leading lenders to tort victims. It extends loans to plaintiffs in the midst of litigation and to their medical providers. Oasis issued its inaugural securitization in February 2020, another at the height of the COVID crisis in June, and once again in February of 2021. It provided a succinct summary of the capital market appetite for esoteric ABS during the pandemic.
Its first “single-A” rated $122 million bond was issued at a spread of 225 over swaps, or 3.85% all-in. Four months later, the company paid a spread of 400 bps over swaps (4.25% all-in) to clear a much smaller $68 million bond. By February 2021, however, that COVID premium had all but disappeared. With benchmark rates still low, the company issued a $112 million bond at 2.60% all-in or a spread of 240 bps over benchmark rates.
The COVID-19 pandemic presented enormous challenges to the market as a whole. For a few weeks early in the COVID crisis, issuance came to a virtual halt. With the Fed reducing rates to offset economic dislocation, strong performance of underlying asset classes, and disaster-proof esoteric ABS bond structures, capital markets did return. Although investors initially demanded a premium, those spreads quickly tightened.
Resilience in the ABS market — particularly with respect to “esoteric” or “off-the-run” asset classes — can be a boon to corporate issuers. If a borrower has assets with a history of stable cash flows and a balance sheet ill-suited for a corporate revolver or traditional term debt, or if a company is looking to diversify its liquidity sources, that borrower should consider this corner of the U.S. capital markets. The esoteric ABS market is very much open for business.
Fouad S. Onbargi is head of structured and asset finance at EA Markets.
Spreads and yield benchmark data throughout this presentation was provided by FinSights and Bloomberg.