In February 2020, industry leaders from the world of structured finance gathered in Las Vegas for SFVegas 2020. The Structured Finance Association (SFA) event saw market participants including investors, issuers, financial intermediaries, regulators, law firms, accounting firms, technology firms, rating agencies, servicers and trustees gather on a busy weekend in Nevada, with the buzz of heavyweight boxer Tyson Fury’s emphatic win over Deontay Wilder still ringing round the Strip.
As always the conference pulled no punches, discussing key themes we need to focus on this year – and beyond – in the world of structured finance, which we’ve summarized for you below:
Tightening spreads, and a move to more esoteric asset classes
So far in 2020, the continued compression of ABS spreads have led to investors looking for new yield opportunities. With this in mind, many conference attendees are looking towards esoteric asset classes to deliver better yield potential. At SFVegas 2020 there were seven panels covering esoteric and private asset classes such as whole business, equipment and solar ABS, underlining the changing marketplace and the need for new and evolving asset classes. Another emerging esoteric asset class which was discussed is the oil and gas ABS market. This asset class is normally backed by proven developed producing (PDP) reserves, or the estimated remaining volume of reserves from existing oil or gas wells. On the back of two successful transactions from last autumn, this is a new asset class which we will continue to monitor with interest.
Another topic at the top of the agenda was the potential for environmental, social and governance (ESG) securitization. This follows the general market interest in sustainable investing and the recent rapid growth in green bond issuance globally. The primary roadblock in the development of this market has been the lack of a common framework amongst investors, regulators and rating agencies for ESG investing in structured finance. However, it’s clear from the conversations at the conference that work is being done behind the scenes, and we expect to see this one evolving and growing in the months and years ahead.
As you’d expect, the theme of LIBOR transition was at the forefront of many attendees’ thoughts, and the packed panels demonstrated the concerns that many people have. The overwhelming feeling is that the market is still not prepared for the end of LIBOR, scheduled for the end of 2021. Many questions still remain about the introduction of its primary replacement, SOFR, while among the securitization market there seems to be a nervousness ahead of implementation, with many unknowns still to resolve. We will continue to monitor developments closely and keep you updated with progress.
10 years on from the credit crunch
We are more than 10 years into the current investment cycle post the 2008 credit crunch. And given the time that has passed, the view of some at the conference was that a close eye should be kept on traditional consumer ABS asset classes, which represent the foundation of the US ABS market. In particular, the subprime auto ABS space has seen increasing loan terms and higher default rates in the underlying collateral, as well as new structural features, such as revolving pools. Neither the collateral nor the structures have been put to test through the credit cycle.
Diversity and Inclusion
One thing that was evident all conference was the promotion of diversity and inclusion across the week in Vegas. Nearly all the keynote remarks we witnessed were delivered by female speakers, an important and welcomed progression from previous years.
As the curtain fell on another conference, there was a degree of caution among attendees as we left Las Vegas. The Democratic Party caucus had also taken place in Nevada that week, reminding us all that a US election is only a matter of months away. And with the coronavirus outbreak on everyone’s mind, there’s plenty to contemplate as 2020 unfolds.