In their never-ending search for bonds that pay more than a pittance in interest, investors are seeking out some of the world’s most exotic securities: investments built out of freight containers, cell phone towers, timeshare holiday homes, pizza restaurant profits, and even Charlie Brown merchandise.
New issuers are taking advantage of this investor demand and raising money by selling what are known as “esoteric asset-backed securities.” Bankers are betting that what has been a relative cottage industry on Wall Street could grow this year.
In recent weeks, securities made from shipping containers and timeshares have priced at higher levels than ever before. That has reduced the yield for investors. But as long the yields remain higher than those on more traditional asset-backed securities – such as those built out of mortgages and car loans – investors are snapping them up when they are first sold or in the secondary market.
“Whether it is rental cars, containers, cell towers, restaurants or other whole-business securitizations, we have seen increasingly strong demand,” says Cory Wishengrad, co-head of the U.S. asset-backed securities (ABS) business at Barclays.
There is no agreed definition of “esoteric ABS”: It is the equivalent of an “other” or “miscellaneous” category, the stuff that is left over after you have counted more traditional ABS.
Cash flows from assets, such as shipping containers, loans such as those for timeshares, or even from whole businesses such as Domino’s Pizza franchises, are pooled together, and bonds are issued that will pay interest out of those cash flows.
The category can include some unusual assets, including ABS built out of the income from selling horse semen, or revenues from Miramax’s back catalogue of movies such as Pulp Fiction. In November, the brand management company Iconix Brand Group raised $600-million (U.S.) by securitizing much of its portfolio, which includes the Peanuts cartoon characters and the Sharper Image retail brand.
On Moody’s definition, there were $19.2-billion of ABS built out of esoteric assets or individual businesses in the U.S. last year, a little less than 10 per cent of the total $199.4-billion of ABS issuance recorded by industry group Sifma.
Moody’s analyst Justin Kalnins says that issuance has been limited because of a shortage of business opportunities that need financing. “Although commercial and esoteric ABS issuance remains range-bound near $20-billion as persistently slow growth limits financing needs, it is well above its recent low in 2008,” he told clients.
As the limited number of business opportunities needing funding has kept a lid on supply, increased demand from investors has been pushing prices up and yields down, sometimes quite dramatically.
Seacube Container Leasing Ltd., a New Jersey-based freight business, last week raised $250-million selling bonds backed by income from its shipping containers. It had to pay an interest rate of just 2.83 per cent on the bonds. A timeshare ABS sold by Wyndham Worldwide, which runs holiday resorts across the U.S., included a tranche of triple B-rated bonds that yielded just 2.4 per cent, a record low.
American Tower Corp., selling bonds backed by cell phone towers, raised $1.8-billion in the biggest single cell tower ABS ever. That deal included $1.3-billion of 10-year bonds, which are normally harder to sell because their long duration makes them riskier than most.
These low financing costs are tempting in new entrants. American Railcar Leasing, which leases t tankers for shipping by rail, and Beacon Intermodal Leasing and CAI in the shipping container sector, are among new issuers that emerged in the past year.
And there is talk now of whole new classes of esoteric ABS, as bankers work on the first securitizations of solar panels. The panels are being leased to homeowners across the U.S. sun belt and could find themselves as collateral backing ABS later this year.
Bankers are bullish. “We expect to see at least 10- to 12-per-cent increase in issuance from 2012 levels,” said Shailesh Deshpande, co-head of esoteric ABS finance at RBS Securities. Barclays, meanwhile, is forecasting close to $30-billion of issuance of non-traditional ABS this year.
After the securitization industry’s conference in January, which brought together issuers, bankers and investors, Barclays began telling clients to move into esoterics as the only non-mortgage ABS area offering yields of up to 3 or 4 per cent.
Mr. Wishengrad is still optimistic about the sector’s prospects, but he warns that investors have to work for the extra yield.
“The non-traditional ABS universe is relatively niche, and that is why investors enjoy attractive yields,” he says. “They require more credit work, coming up to speed in any one sector requires time and energy.”