Securitization 2014: Our Not So Scientific Projections

As we have for the last few years, we conducted an informal poll of several industry professionals over the last several days to solicit feedback on their reactions and findings coming off the big industry gathering in Las Vegas; this year’s event the SFIG which was held late last month. This year, we thought we would pick a few topics that seemed to come up on a repeated basis with the professionals we spoke with and transform them into some predictions for the coming year.

So in no particular order, here are some of more important topics that the industry will be working on and talking about in 2014:

**CLO’s Will Regain Their Footing:  While there have been a few curves thrown on the regulatory side both in the US (Volker) and in Europe (Manager Retention), we think it will be the confluence of a search for yield among investors and the continuing stability in the performance of the underlying bank loan market that will win the day. We’d look for consistently growing demand among both existing and new investors and the pressure from the bank lenders themselves on the regulators to find a way to encourage the growth of the securitization markets in this way, as key ingredients to CLO issuance rebuilding momentum as we move through the year.

** Solar Securitization Will Become Mainstream:  While we are not ready to predict that a large number of transactions will be completed in 2014, if we go back through the history of the securitization industry to examine how other asset class structures developed, we can suggest that there will be some significant progress made in 2014 in bring this asset class into the mainstream. As we have seen in the past, when this many people are spending this much time searching for the right structures, the end result will be one or more variations of a very workable structure, probably developed by smaller or incubation sized originators that will set the foundation. Ultimately this will lead to more investors and then larger banks with larger distribution channels getting into the mix. Now, this may not all happen in 2014 but we believe that the foundation will be set in the coming months. Who knows, within a few years time we will all understand why there was all that talk in 2014 about solar. The fact that this asset class is high profile, does not have the stigma of pre-crisis asset classes and carries a socially conscious banner will all work to Solar’s advantage.

** REO to Rental Securitizations Will Be a Hot Product: Unlike Solar, this asset class or structure cannot escape some of the pre-crisis notoriety. Nevertheless, with many hedge funds and other distressed investors accumulating properties over the last several years, the slow but nevertheless sustained recovery of the US housing market and employment and the steady return of investors to the private rmbs market place in search of yield, we predict that when we get to November and December, we will all be talking about how fast this market took off in 2014. While there are several market recovery related issues that may cap just how long and robust this market will be, it seems pretty clear to us the several variations of this structure which are being developed will play a major role in absorbing much of the excess capacity in the US housing market that still remains either directly or indirectly on the books of the mortgage originators. Pushing these loans into new structures and bringing new investors into the pool should have a significant effect on liquidity in several important segments.

** Securitization Will Be Recognized as Good for the Markets: Who could have imagined even just 2 or 3 years ago that any politician or regulator would have had a good word to say about the structured finance markets. Unbelievably, now hardly a week goes by when you can’t read a quote from these overseers about how “we need to find a way to revive the securitization markets in both the US and Europe”. Not to be left behind are new pronouncements coming from Asia and Latin America about new and encouraging regulations or general support for these structures. Seems that the days may be gone for demonizing the “shadow banking system” and finally, a broadening recognition that securitization plays a vital role in bringing non-financial investors into the markets of financial assets, thereby creating liquidity and diversifying risk.  Obviously, this only refers to structures and markets that are properly run but isn’t that the case for any market?  Maybe not such a bold prediction but we foresee continuing momentum in 2014 for the return of the structured markets as an acknowledged “key” to the growth and even the stability of the global economy.

There were a few others topics that almost made our list, most notable was the observation that there is still not enough structural innovation going on in the markets right now. Our own view on that topic is that while the observation may be very true, given the long road back for the markets and particularly investor confidence, how can a heavy dose of “plain vanilla” structures be viewed as unexpected.  If you’ve been around the structured markets as long as we have, you can take some solace in the understanding that we have been in similar (if not as severe) cycles in the past. As the recovery continues, investors will look for yield and customization which will feed a push to innovation. This we believe, is inevitable.