The Structured Finance Market 10 Years After The Crisis. Darrell Wheeler, Managing Director (1)

Transcription

1 The Structured Finance Market 10 Years After The Crisis Darrell Wheeler, Managing Director (1)

2 Agenda Introduction: Structured Finance Since The Crisis Darrell Wheeler, Managing Director/Head Of SF Research The U.S. Market: John Anglim, Senior Director Consumer ABS - Consumer ABS Back and Cautiously Supporting Growth Jim Digney Analytical Manager, CMBS - CRE Lending Now Dominated By Banks/Funds/Insurers Alicia Clarke, Director RMBS Starting to Provide More Financing Eric Hudson, Senior Director - CLOs Strong Post Crisis Performance Is Helping Finance The Economy Kate Scanlin, Senior Director - Esoteric ABS Steady Demand for Cash Flow Joanne Desimone, Director - Commercial ABS TALF Helped Various Global Markets Have Had Different Responses: Aaron Lei, Senior Director Asia Erin Kitson, Director Australia Yuji Hashimoto, Senior Director, Japan Andrew South, Managing Director, Europe Sanjay Narine, Associate Director, Canada Leandro De Albuquerque, Analytical Manager, Latin America 2

3 Loans/Securitized Products Outstanding Q AUTO LOANS/LEASES ,111 1,119 % Auto Loans Held at U.S. Comm and Savings Banks 40% 40% 39% % Securitized 19% 25% 22% 23% 16% 18% 18% 17% CREDIT CARD DEBT , ,009 % Credit Card Loans Held at U.S. Comm and Savings Banks 29% 41% 31% 69% 67% 68% 63% % Securitized 34% 36% 36% 32% 26% 15% 13% 12% STUDENT LOAN ,146 1,407 1,438 % Securitized 39% 28% 20% 13% 13% COMMERCIAL MORTGAGES 1,242 1,681 2,259 3,233 3,207 3,188 3,801 3,856 % CRE/MF Loans Held at Depository Institutions 48% 50% 50% 48% 48% 48% 51% 51% % CRE/MF Loans Held at Insurance Companies 16% 13% 11% 10% 9% 11% 11% 12% % CRE/MF Loans Held at GSEs 5% 7% 8% 7% 10% 12% 14% 14% % SECURITIZED 8% 15% 17% 23% 21% 20% 17% 16% RESIDENTIAL MORTGAGES 4,273 5,675 8,292 11,240 10,502 9,946 10,266 10,330 % Residential Loans Held at Depository Institutions 31% 29% 29% 27% 25% 24% 24% 24% % Residential Loans Held at GSEs + Agency/GSE Pools 51% 53% 46% 43% 55% 60% 62% 62% % Nonagency RMBS Securitized 18% 24% 16% 11% 8% 8% S&P/LSTA LEVERAGED LOANS % SECURITIZED 49% 61% 55% 56% 44% 50% 51% Source: Federal Reserve, SIFMA, S&P Capital IQ LCD, Wells Fargo, S&P Global Ratings. 3

4 Securitization Utilization As a percentage of outstanding loans, the securitization rates remain well below their peaks, and have generally flattened out in recent years, despite strong increases in underlying loan volume. 70% Q1 Securitization Utilization By Sector 60% 50% 40% 30% 20% 10% 0% Q1 Auto ABS Credit Card ABS Student Loan ABS Nonagency RMBS CMBS CLO Source: Federal Reserve, SIFMA, S&P Capital IQ LCD, Wells Fargo, S&P Global Ratings. 4

5 Cumulative Default Rate, Mid-2007 To End-2016, By Rating Count (Based On Universe As Of July 1, 2007) U.S. Rest of World ABS 2.0% 1.60% Structured Credit (excl. CDOs of ABS) 6.60% 8.60% CDOs of ABS* 70.20% 18.20% CMBS 29.9% 14.10% RMBS 48.7% 1.30% *CDO of ABS defaults were related to defaults and downgrades in the underlying RMBS and CMBS collateral Eventual losses are expected to be 6% on CMBS collateral and 18% on RMBS collateral. Source: S&P Global Ratings 5

6 2016 Summary Structured Finance Upgrades, Downgrades and Defaults Ratings (no.) Stable (%) Upgrades (%) Downgrades* (%) Defaults (%) Defaults (no.) Overall Region U.S Europe Australasia Japan Canada Latin America Other EM R Asia (excl. Japan) Sector RMBS Structured Credit ABS CMBS Single-Name Synthetics Region and Sector U.S. RMBS U.S. Structured Credit U.S. ABS U.S. CMBS U.S. Single-Name Synthetics Europe RMBS Europe Structured Credit Europe ABS Europe CMBS Australasia Japan Other Source: S&P Global Ratings 6

7 2016 Summary Structured Finance Upgrades, Downgrades and Defaults Ratings (no.) Stable (%) Upgrades (%) Downgrades (%) Defaults (%) Defaults (no.) Vintage Summary Pre Rating Category AAA AA A BBB BB B CCC CC Rating Grade Investment-Grade Speculative-Grade Source: S&P Global Ratings 7

8 Structured Finance Issuance H H1 % Change 2017 forecast U.S. ABS (bil. $) % Auto loan/lease/rental cars % Cards % 50 Student loan % 15 Equipment/fleet/floorplan % 25 Other ABS (esoteric, mobile phone) % U.S. CMBS % SASB/LL % U.S. CLO % 90 U.S. RMBS-related % 60 Total U.S % Canada (bil. C$) % Europe (bil. ) % Asia (bil. $) China % 140 Japan % Australia % Latin America Brazil % 8 Argentina % 3 Chile Colombia % 1 Mexico % 2 Crossborder (US$) % 2 LatAM Total % 16 Approximate Global total (bil. $) % Source: S&P Global Ratings 8

9 Consumer ABS Back and Cautiously Supporting Growth John Anglim, Senior Director (1)

10 S&P Global Ratings Credit Card ABS Outlook We expect weaker credit performance in the sector from subprime accounts and looser underwriting. Loss rates will likely increase bps from historical lows of around 2%, assuming more non-prime new accounts are originated and added to trusts when issuance picks up. Based on our regression analysis using our base line economists' unemployment forecast, we project that by late 2017 loss rate will climb to about 3% for our moreseasoned and higher quality securitized U.S. bank card index and about 3.4% for the industry as a whole. We expect about $50 billion new credit card ABS in Issuance is opportunistic and mainly driven by cost of funds and diversification. Strong demand for AAA rated senior notes issued by large banks. Steady flow of cross border transactions from Canadian banks. Regulatory constraints include TLAC, HQLA, liquidity and capital requirements, among others. Issuance may increase with rising deposit rates, ABS maturity schedules, increasing receivables, improved liquidity in the secondary market, and new issuers. 10

11 U.S. Bank Credit Card Quality Index (CCQI) - $217 Billion Receivables We use our U.S. Credit Card Quality Index (CCQI) as an industry benchmark against which we compare and measure outstanding credit card portfolios, based on collateral performance. - The CCQI is a monthly performance index that aggregates performance information across S&P rated transactions in the following key risk areas: receivables outstanding, yield, payment rate, charge-off rate, delinquencies, base rate, and excess spread rate. Dec 2016: Charge-offs 2.2% (vs 5.1% historical); 30-plus-day delinquencies 1.5% (vs 4.1% historical); Payment rate 27.3 (vs 18.3% historical); Yield 18.7% (vs 18.8% historical); Excess spread 13.6% (vs 8.2% historical). 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Jan/2000 Jun/2000 Nov/2000 Apr/2001 Sep/2001 Feb/2002 Jul/2002 Dec/2002 May/2003 Oct/2003 Mar/2004 Aug/2004 Jan/2005 Jun/2005 Nov/2005 Apr/2006 Sep/2006 Feb/2007 Jul/2007 Dec/2007 May/2008 Oct/2008 Mar/2009 Aug/2009 Jan/2010 Jun/2010 Nov/2010 Apr/2011 Sep/2011 Feb/2012 Jul/2012 Dec/2012 May/2013 Oct/2013 Mar/2014 Aug/2014 Jan/2015 Jun/2015 Nov/2015 Apr/2016 Sep/2016 Feb/2017 Yield Spread Rate Charge-off Rate Delinquency Rate Payment Rate We also compare the credit risk of a specific pool with other portfolios that we consider to be in the same peer group based on collateral characteristics. Source: Standard & Poor s Global Ratings. 11

12 Charge-Off Rate The 'AAA' peak charge-off rate for our U.S. benchmark pool is 33%, which should remain operative in periods of mild to moderate economic stress when unemployment rates are below 10%. Pool specific variations in actual and projected base-case performance relative to the benchmark pool, as well as collateral characteristics relative to an issuer s peer group, may cause the AAA stressed loss rate for actual pools to vary higher or lower than the benchmark s 33% peak loss level. Loss rates are assumed to increase from the base case over a month period to a peak loss rate and then remain constant. 12.0% CCQI (U.S. Bankcards) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jan/2000 Oct/2000 Jul/2001 Apr/2002 Jan/2003 Oct/2003 Jul/2004 Apr/2005 Jan/2006 Oct/2006 Jul/2007 Apr/2008 Jan/2009 Oct/2009 Jul/2010 Apr/2011 Jan/2012 Oct/2012 Jul/2013 Apr/2014 Jan/2015 Oct/2015 CCQI Loss Rate U.S. Unemployment Rate Private & Confidential 12

13 Charge-Off Rate cont. 12.0% CCQI (U.S. Bankcards) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jan/2000 Jun/2000 Nov/2000 Apr/2001 Sep/2001 Feb/2002 Jul/2002 Dec/2002 May/2003 Oct/2003 Mar/2004 Aug/2004 Jan/2005 Jun/2005 Nov/2005 Apr/2006 Sep/2006 Feb/2007 Jul/2007 Dec/2007 May/2008 Oct/2008 Mar/2009 Aug/2009 Jan/2010 Jun/2010 Nov/2010 Apr/2011 Sep/2011 Feb/2012 Jul/2012 Dec/2012 May/2013 Oct/2013 Mar/2014 Aug/2014 Jan/2015 Jun/2015 Nov/2015 Apr/2016 Sep/2016 Feb/2017 CCQI Loss Rate U.S. Unemployment Rate 13

14 We expect bps increase in credit card loss rates in 2017 (base case) S&P Global Ratings Credit Card Loss Rate Forecast (%) /1/2018 7/1/2018 4/1/2018 1/1/ /1/2017 7/1/2017 4/1/2017 1/1/ /1/2016 Source: S&P Global Ratings CCQI Base-case scenario FRB Base-case scenario CCQI Recession Stress FRB Recession Stress 14

15 U.S. Credit Card Charge-Offs Will Likely Face An Uphill Climb - Summary of Regression Results And Economic Scenarios (Year-End December Figures) Upside Scenario Unemployment rate (%) Revolving credit (bil. $) Household debt service ratio (%) Personal bankruptcies (000s) Predicted CCQI charge-off rate (%) Predicted FRB charge-off rate (%) Base-case Scenario Unemployment rate (%) Revolving credit (bil. $) Household debt service ratio (%) Personal bankruptcies (000s) Predicted CCQI charge-off rate (%) Predicted FRB charge-off rate (%) Stress Scenario 1 Unemployment rate (%) Revolving credit (bil. $) Household debt service ratio (%) Personal bankruptcies (000s) Predicted CCQI charge-off rate (%) Predicted FRB charge-off rate (%) Stress Scenario 2 Unemployment rate (%) Revolving credit (bil. $) Household debt service ratio (%) Personal bankruptcies (000s) Predicted CCQI charge-off rate (%) Predicted FRB charge-off rate (%) Super Stress Scenario 3 Unemployment rate (%) Revolving credit (bil. $) Household debt service ratio (%) Personal bankruptcies (000s) Predicted CCQI charge-off rate (%) Predicted FRB charge-off rate (%) CCQI--Credit Card Quality Index. FRB--Federal Reserve Board. Source: S&P Global Ratings 15

16 S&P Global Ratings Auto Loan ABS Outlook Given our forecast for lower U.S. auto sales of 17.2 million units, we re expecting auto loan ABS volume of between $66.5 billion (last year s level) and $70 billion--5% growth. Prime Autos - Losses are rising y-o-y for the 2015 and 2016 securitizations due to normalization of lending standards, slightly weaker mix of securitizers, higher consumer debt levels, and lower recovery rates due to higher off-lease volumes. We expect performance to soften further due to lower recovery rates and manufacturers and lenders becoming more aggressive (by lengthening loan terms) in light of flattening vehicle demand. Subprime (SP) Autos - Given the wide breadth of subprime auto finance companies, performance will remain issuer-specific. Deep subprime has become a larger share of SP issuance and is impacting our Auto Loan Static Index. CNLs for the 2015 vintage, 8.0% through month 19, are 19% higher than the 2014 vintage and are at their highest level since However, after excluding three large high-loss issuers, modified SP CNLs of 5.78% are in line with 2012's and 2013 s performance. CNL for 2016 subprime and modified subprime indexes are trending higher than C/E levels have increased for several issuers reporting higher losses. Further, auto ABS deals benefit from rapid deleveraging, which builds C/E for the senior classes as subordination grows relative to the declining pool balance. As a result, we expect ratings to remain stable this year, especially for investment grade classes. For the first half of 2017, we upgraded 139 auto ABS tranches, affirmed 151, and downgraded none. 99 of the upgrades were in subprime auto loan ABS. 16

17 Subprime Auto Loan ABS Performance Subprime Cumulative Net Losses (%) By Vintage Cumulative Net Loss (%) Modified 2015 Source: S&P Global Ratings 17

18 Auto Loan ABS Back Testing 9.00% PRIME: U.S. ABS Auto Loan Losses BBB Projected Cumulative Net Losses vs. Realized 8.00% 7.00% BBB Projected Losses 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% Realized Cumulative Net Loss Source: Standard & Poor s Ratings Services. 18

19 Auto Loan ABS Back Testing 45.00% SUBPRIME: U.S. ABS Auto Loan Losses BBB Projected Cumulative Net Loss vs. Realized 40.00% 35.00% BBB Projected Losses 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% Realized Cumulative Net Loss Source: Standard & Poor s Ratings Services. 19

20 How Will Auto ABS Pools Perform Through A Credit Cycle? The Forecasts Unemployment rate (%) Household debt service ratio (%) Manheim Used Vehicle Value Index Prime net loss rate (%) Subprime net loss rate (%) Base-case Scenario Stress Scenario Stress Scenario Stress Scenario Upside Scenario Source: S&P Global Ratings 20

21 Student Loans Outlook: Limited Growth Projected Federal Family Education Loan Program (FFELP) and private student loan ABS credit quality remains stable in issuance is expected to be relatively flat with 2016 with a full year forecast of $15 billion The number of deals backed by private student loans will outpace the number of FFELP backed transactions as observed the last few years Student loan refinance companies continue to grow their footprint in this sector Navient is expected to be active again in 2017 after closing 8 deals totaling over $6 billion last year Continue to monitor payment rates and the legal final maturities for FFELP transactions with a strong focus on maturities within the next five years 21

22 CMBS - CRE Lending Now Dominated By Banks/Funds/Insurers James Digney, Senior Director (1) james.digney@spglobal.com Deegant Pandya, Senior Director (1) deegant.pandya@spglobal.com

23 Conduit CMBS Average Transaction Size Average Loan Count $3, $3, $2,500 Average Loan Size $2,000 $1,500 $1,000 $ Average Loan Count $ Year Source: S&P Global Ratings 23

24 Conduit CMBS Property Type Mix Source: S&P Global Ratings 24

25 Summary of Reviewed Conduits Weighted Averages Q Q No. of Transactions Reviewed No. of Transactions Rated Average Number of Loans S&P Global Ratings' LTV 85.5% 90.0% 91.3% 90.6% 88.7% S&P Global Ratings' DSC 1.65x 1.52x 1.71x 1.72x 1.70x S&P Global Ratings' Beginning Debt Yield 9.6% 9.0% 9.0% 9.1% 9.2% Final Pool Herf/S&P Global Ratings reviewed Herf 24.2/ / / / /36.9 % of Full-term IO (final pools) 17.1% 19.2% 33.0% 45.9% 42.6% % of Partial IO (final pools) 32.7% 44.1% 33.9% 30.0% 28.1% S&P Global Ratings NCF haircut (%) (7.6) (8.4) (10.8) (11.9) (12.1) S&P Global Ratings value variance (%) (24.3) (25.2) (32.1) (33.3) (31.5) 'AAA' Actual/S&P Global Ratings CE (%)(i) 21.7/ / / / /24.3 'BBB-' Actual/S&P Global Ratings CE (%)(i) 6.9/ / / / /9.2 (i)s&p Global Ratings' CE levels reflect results for pools that we reviewed. Actual CE levels represent every deal priced within a selected vintage, not just the ones we analyzed. LTV--Loan-to-value. DSC--Debt service coverage. HERF--Herfindahl score. CE--Credit enhancement. IO--Interest-only. NCF--Net cash flow. 25

26 Overall Loan Maturity Activity For 2017 Billions Liquidated Pay off Prepay Outstanding Source: S&P Global Ratings 26

27 U.S. RMBS Starting to Provide More Financing Alicia Clarke, Director & Lead Analyst (1)

28 U.S. RMBS 2017: 10 Years Later Continued home-price appreciation and a mild up-tick in the 30-year fixed mortgage rate accompanied by mild decline in unemployment rate These factors should continue to support improving residential mortgage collateral performance Effects of Home Price, Unemployment Rate & Mortgage Rate on Residential Mortgage Performance Forecast Region RMBS 60+ Days Delinquency Rate (incl FCL & REO) Case-Shiller 20-City HPI (SA)* Unemployment Rate (SA)* 30-Year Fixed Mortgage Rate Dlinquency/Unemployment/Mortgage Rate (%) Case-Schiller Index (inverted) Sources: The U.S. Economy Goes From Signs of Shining To As Good As It Gets Sources (cont'd): CoreLogic, Bureau of Labor Statistics, Freddie Mac, and Standard & Poor's *Seasonally Adjusted 28

29 U.S. RMBS: Mid-Year 2017: 10 Years Later (continued) Housing starts continue with a general increase but are still well-below their historical averages (10 years ago they were almost 50% higher) A historically low home-ownership rate is reinforced by the greater share of multifamily starts than seen historically Source: With More Americans Homeward Bound, The U.S. Housing Market Has Room To Run (S&P Global) 29

30 U.S. RMBS 2017: 10 Years Later (continued) Residential mortgage origination volume forecasted to be $1.62 trillion in 2017 (somewhat unchanged from prior forecasts) compared to $1.89 trillion in 2016 (according to Mortgage Bankers Association) Irrespective of origination volume, non-agency issuance volume has been comparatively stronger than this time last year: transaction types include credit-risk transfer (CRT) and reperforming Non-QM transaction issuance volume has also grown Transaction sizes are roughly $200-$250 million overall with average loan balances typically ranging from 300K-500K, pool coupons averaging roughly 6.5% (250 basis points over conforming), and inclusion of loans that may include prior credit events, Appendix-Q fall-outs, and investor properties New Presidential Administration could result in greater emphasis on Housing & Mortgage Finance reform Discussions already surfacing on changes and 2017 is expected to focus more on this topic than the last several years 30

31 CLOs Strong Post Crisis Performance Is Helping Finance The Economy Jimmy Kobylinski, Senior Director (1)

32 CLO Default Performance: Top 250 CLO Assets Versus The Market

33 Rating Corporate Metrics Q Default SG Distressed Ratio and Default Rate Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 default rate distressed ratio US Speculative-Grade Rating Actions Mar-15 Apr-15 UG May-15 Jun-15 Jul-15 Aug-15 DG Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr May-17 Jun-17 Distressed 33

34 U.S. CLO Performance Outlook for 2017 U.S. CLO performance remains stable Through second-quarter 2017, 118 tranches from 37 U.S. CLO transactions had their ratings upgraded This compares to 581 tranches from 181 CLOs with ratings upgraded in full-year 2016 Upgrades stem from de-leveraging of CLO 1.0 and 2.0 transactions and stable credit performance Continue to see high volume of optional redemptions among CLO 1.0 and early vintage CLO2.0s transactions Continue to see high volume of refinancing and resets of CLO 2.0 transactions while the short-tem default outlook is now below average: U.S. Speculative-Grade Corporate Default Rate (12-month trailing) March 2018 Forecast Long Term Historical Average June 2017 Actual Base Optimistic Pessimistic 4.4% 3.8% 3.3% 2.8% 3.9% But, there are causes for concern: Corporate downgrades continue to be elevated, though defaults in so far in 2017 have slowed considerably when compared to last year Certain sectors with exposure in CLOs (including retail and energy) are continuing to show signs of stress The longer-term speculative-grade default outlook is expected to stabilize towards the end of the first quarter of 2018 U.S. CLO 2.0 transaction ratings: We expect senior tranche ratings (AAA, AA) and virtually all mezzanine tranche ratings (A, BBB) to remain stable. Some subordinate CLO tranche ratings (BB, B) may see ratings lowered if they have exposure to loans from distressed, downgraded or defaulted companies, especially for CLOs with a higher-than-average par loss.

35 Esoteric ABS Steady Demand for Cash Flow Kate Scanlin, Senior Director (1)

36 Non-Traditional Asset Classes Total Number of Transactions Covered by Non- Traditional Securitization Whole Business, 13 Aircraft, 35 Number of Transactions Rated in 2015, 2016 & 2017 YTD Triple Net Lease, 16 Tobacco, 36 Gas Prepay, 28 Container, 30 Insurance Rel, 5 Other, 20 Railcar, 17 Sector YTD Aircraft Container Insurance Related Other Railcar 2 2 Small Business 2 1 Stranded 2 3 Timeshare Tobacco Triple Net Lease Total Timeshare, 48 Small Business, 37 Struct Settle, 20 Stranded, 41 Source: S&P Global Ratings 36

37 Commercial ABS TALF Helped Joanne Desimone, Director (1)

38 Commercial ABS Outlook: Stable Credit But With Movement Off Of Record Lows Delinquencies have been running at record-low levels for more than five years reflecting the strong credit quality of obligors that survived the great recession. While delinquencies are expected to edge upward off record lows, reflecting the increasing presence of newer businesses, credit quality remains strong and ultimate net loss levels are expected to remain stable and well below recessionary levels. Cumulative Total Delinquency % Current Pool Balance Equipment ABS Delinquencies Non- Fleet 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Quarters Since Closing transactions avg transactions avg transactions avg Source: S&P Global Ratings 38

39 APAC Securitization: Markets Down, But Now Growing Aaron Lei, Senior Director (852) Erin Kitson, Director (61) erin.kitson@spglobal.com Yuji Hashimoto, Senior Director 81(0) yuji.hashimoto@spglobal.com 39

40 Asia: Recovering, but Cautiously Once a vibrant market with active issuance of various asset classes in different countries Experience during the financial crisis kept Asian investors away for securitization for years Exposure to global CDO and US subprime RMBS resulted in huge loss, but local assets supported transactions have performed well Issuers tapping the market in recent years as investors regain confidence on the product, but the recovery is slow and cautious Korea is the only market that maintains regular and large-size issuance, which benefits the residential mortgages originators and credit card companies. The rollout of covered bonds in Korea and Singapore represents regulators and investors selective confidence Securitization of nontraditional assets is also seeing some mild activity, although moderate 40

41 China: Utilizing Securitization for Economy Starting in 2005, China is now the second largest securitization market; expecting USD 140 billion issuance in 2017 The global financial crisis had limited impact to the market due to the stringent issuance regulations and quality control CLO, RMBS, auto loan ABS, consumer receivables ABS, lease receivables securitization developing well Securitization part of the policy initiatives to facilitate development of China economy and financial markets Issuers tapping the market for alternative financing channel, to support the quick business growth Banks using the products to manage balance sheet pressure Investors redirected to the market for the better transparency and asset quality 41

42 Australian new issuance up but below pre-crisis peaks SF issuance in Australia peaked in Issuance in 2016 was around $US24bn; 63% lower than its pre crisis peak. Retreat of offshore investors, higher margins and a tougher regulatory landscape resulted in lower issuance volumes. RMBS, ABS and more recently covered bonds are the main asset classes. Collateral performance pre and post crisis has been very good but tightening in lending standards post crisis has further improved overall collateral quality (eg. Less Lo Doc now). Low interest rates and relatively stable employment conditions have underpinned strong collateral performance and ratings stability. Increasing demand for yield especially from Japanese investors has seen a resurgence in RMBS issuance in

43 Japan s low yields create the global structured finance investor SF issuance in Japan peaked in 2006, but declined since then. Issuance in 2016, which was JPY5,753 bil, was as about half as large as that of RMBS and ABS have been the major structured finance products issued over the past few years, and their performance has generally been strong as evidenced by strong rating performance. Demand to SF products from Japanese investors is strong. Thus there is a potential for increase in issuance. Originators have limited economic incentives to use securitization as they can take on funding at low rates from Japanese banks without using securitization. Given the shortage of securitization products in Japan, Japanese investors have actively targeted securitization products overseas, such as U.S. CLOs and Australian RMBS. 43

44 European Securitization: Uncertain Regulations Lead To Increase In Private Portfolio Lenders Andrew South, Managing Director (44)

45 Europe s Issuance Still Low But Growing Steadily European investor-placed securitization issuance ( bn) H H2 Source: S&P Global Fixed Income Research, J. P. Morgan. Includes structured credit, e.g. leveraged loan CLOs. Excludes CLO refis and resets. 45

46 Non-Bank Securitization Becoming New Norm Multiple lending and business models displacing use as a bank funding tool Mix of originator/sponsor types in new issuance 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2011 Banks CLO managers Other non-banks Ongoing traditional use as funding by non-bank corporates (e.g. autos) and investment vehicle for CLO managers Source: S&P Global Fixed Income Research, J. P. Morgan H1 Funding for acquired off-the-run, non-core assets (e.g. orphan portfolios, NPLs) New breed of on-the-run lending/business models (e.g. P2P, non-corporate debt funds) 46

47 Canada: A Tale Of Recovery From ABCP Failure Sanjay Narine, Associate Director (1) sanjay.narine@spglobal.com 47

48 Canada ABS Market After nearly 10 years of recovery, consumer spending is buoyant and supportive of the ABS market Motor vehicle expenditure as a proportion of retail sales is a key driver in consumer spending Consumer credit excluding mortgages has increased - credit cards, auto and HELCO Retail Sales (Trade) [Monthly Average Seasonally Adjusted ($bln)] Consumer credit outstanding ($bln) (ex. mortgage) 16.00% 14.00% 12.00% 10.00% % % 4.00% 2.00% 0.00% Ex. Motor Vehicle Motor Vehicle Amount ($bln) Growth (RHS) Source: Statistic Canada Source: Statistic Canada 48

49 Canada ABS Market With consumer spending improvement, ABS have slowly emerged back into the mainstream and term ABS and ABCP continue to be vital funding sources of consumer receivables; spread differentials have normalised; but issuance is below pre-crisis levels and spreads are not reflecting the structure of AAA(sf) $20 Term ABS Issuance $10 $ Credit Cards Auto/Equipment RMBS CMBS Source: S&P Global LARGE BANK CARD VS. DEPOSIT NOTES ( 5-YEAR INDICATIVE BASIS) Percentage Canada: Selected MM Yields Source: BMO Capital Markets, as of Mar 31, m_Tbills 3M_Prime CP Spread Source: Bank of Canada, Bloomberg 49

50 Canada Term ABS Market Billions $14.0 $12.0 $10.0 $8.0 $6.0 $4.0 $2.0 $- Canadian Credit Card ABS $12 $10 $8 $9 $8 $7 $7 $6 $6 $6 $6 $5 $5 $5 $4 $ Issuance (LHS) Maturities (LHS) Outstanding (RHS)) $30.0 $25.0 $20.0 $15.0 $10.0 $5.0 $- Billions 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Canadian Credit Card ABS Issuance 6,074 2,967 9, ,671-4,532 4,533 4,892 3,444 4,427 5,325 1,127 1,306 2,217 2, CAD Issuance USD Issuance (in CAD) Source: DesRosiers Automotive Consultants Inc 50

51 Latin America: The Financial Crisis Was One Of Many Leandro De Albuquerque, Analytical Manager (1)

52 Volatile % Real GDP Growth in Latin America (%) Argentina Brazil Colombia Mexico Peru

53 Latin America: The Impact of U.S. Crisis Effects of U.S. financial crisis in Latin America: Mexico: RMBS from NBFI affected by crisis several originators filed for bankruptcy and substitutions were not conducted in a properly manner. Downgrades peaked in 2010 and stabilized after Brazil: Auto loan performance deteriorated because of domestic factors. Securitization market was transformed due to: (i) regulatory change; (ii) sluggish GDP growth after 2014; (iii) banking concentration. Argentina: Collateral performance was generally good. Securitization market was more influenced by domestic factors (high inflation and interest rates). Merchant Vouchers and DPRs (Brazil, Peru and the Caribbean): Collateral performance strong for past 10 years. Slight return of DPR issuances in 2016 from Brazilian and Central American Originators 53

54 Questions and Answers: 54

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