Our Global Financial Markets team attended IMN’s 25th ABS East Conference at the iconic Fontainebleau in Miami. As always, the event provided a great opportunity to chat to a broad range of market participants. This year, securitization issuances have already exceeded those from 2018 and the mood was understandably buoyant. Many European issuers were present, many of whom had invested time marketing in the U.S. and were positive about participating in future deals.
Below are our key takeaways from ABS East:
1. Current economic outlook in flux
Most attendees are expecting some sort of global recession imminently, with many concerned that investors are not currently pricing in for a slowdown. Next year’s U.S. election may have some bearing on the severity of any recession; if President Trump wins, a slowdown may not be as severe. For all the criticism levelled at Trump, capital markets have performed well during his tenure. Elsewhere there’s concern a new democratic president may look to waive or forgive student loan debt, leading to fears that students may start defaulting on their loans now in anticipation of a democratic win in 2020. The impact on existing and any new securitized student loans deals, however, remains to be seen.
2. Replacing LIBOR
World banks are planning to replace LIBOR, with 2021 slated for a possible transition date. LIBOR underpins $200 trillion of financial contracts, ranging from home mortgages to corporate loans, so there’s huge change incoming. Finding a substitute benchmark rate is a key challenge for banks, issuers, and investors alike, with SOFR looking like the replacement of choice among conference-goers. The market has yet to see all of the ramifications of LIBOR being replaced, and only time will tell if SOFR is indeed a suitable substitute.
3. Technology: Always the hot topic
As expected, technology was a subject attendees wanted to talk about. We connected with several ambitious non-bank lenders and fintechs using blockchain technology. There’s been rapid growth in the number of fintechs active in the U.S. credit markets, and some of these platforms are noticeably developing significant scale and sophistication quickly, while simultaneously evolving their funding model. Judging by the exciting talent joining the movement, we expect to see a flourish of activity in this space in the coming year.
4. AI: The next big thing
Several members of the team attended the Women in Structured Finance Networking Breakfast, during which there was a lively discussion on emerging technology applications. The speakers described how we will see increasing interruption from AI and, while people skills will remain important, the feeling is that specialist functions in particular will soon be automated by AI. Our view is that, while AI technology is something investment managers and portfolio analysts will have to be mindful of going forward, it is unlikely to affect us imminently. We’re feeding off the food chain, not creating new asset classes. But AI is certainly something to watch out for and be aware of in the future.
5. Commercial real estate continues on the defensive
Our own Managing Director Joe McFadden was a panelist on the Evolution in Commercial Real Estate Lending discussion. The panel discussed how retail and hospitality property are still considered the least safe for investors, while multi-family housing is more secure. Banks are not doing anything to help, most likely due to the threat of a recession looming (as discussed earlier), and as a result, we see moderate growth in real estate securitization in the months and years ahead.
6. Energy interest continues to rise
Interest in emerging market asset classes relative to oil and gas production was noticeable at ABS East. Oil and gas royalty securitization has been prevalent among emerging markets companies in Latin America and the Middle East for a while. And now circumstances are changing among US participants as they look to tap into the ABS market through reserve based lending (RBL) facilities. We expect more deals involving RBL facilities to be struck later this year. So again, watch this space.