Share Print Securitization in Focus — April 2024 Douglas Gimple 23 May 2024 Asset-backed Securities Issuance continues to be the biggest story in ABS with year-to-date new supply up 42% compared to 2023 and 30% vs 2022. At the current pace, the record of $322 billion set in 2005 could be in reach. ABS YTD issuance ($B) 2024 YTD 2023 YTD 2022 YTD Difference 2024 vs 2023 Auto 70.0 46.9 46.3 +23.1 Credit Card 8.4 4.6 8.9 +3.8 Equipment 8.3 6.2 9.0 +2.1 Student Loan 2.1 1.3 2.0 +0.8 Consumer 14.8 12.7 12.2 +2.1 Other 12.2 9.6 10.4 +2.6 Total 115.8 81.3 88.8 +34.5 ABS YTD 2024 Total Issuance $115.8B (up 42% Y/Y) Majority of Issuance Autos $70.0B Other $14.8B Consumer $12.2B YTD Total Issuance Comparison ($B) Commercial Mortgage-backed Securities Delinquency rate by property type (% 30 days or longer) Private label or non-agency issuance rebounds from the slowdown experience last year with April issuance ($6.6 billion) continuing the trend. CMBS new supply ($B) Totals 2024 YTD $38.0B 2023 YTD $24.0B 2022 YTD $93.0B Residential Mortgage-backed Securities Non-Agency RMBS Mortgage credit spreads remain at the tighter end of historical levels. Non-Agency or private label issuance year to date is roughly $40.1 billion, ahead of issuance over the same time period of 2023 ($28.6 billion). Full year non-agency RMBS issuance expected to reach close to $100 billion, well ahead of ’23’s $80 billion but a far cry from ‘21’s $205 billion. Non-Agency Issuance 2024 YTD $40.1B 2023 YTD $28.6B Agency RMBS Biggest news in this market was that the Fed decided to reduce the cap on the monthly decline in Treasuries (down to $25B per month from $60B per month), while MBS runoff will continue at up to $35B with any reinvestments directed towards Treasuries. Per the New York Federal Reserve, the MBS holdings on the Fed balance sheet have decreased from $2.7 trillion in June 2022 (the start of QT) to $2.4 trillion as of early May 2024, a monthly average well behind the monthly cap. The Treasury allocation on the balance sheet has decreased from $5.7 trillion to $4.4 trillion over the same period. Understanding Credit Enhancements The credit enhancement associated with securitized assets provides protection for the notes (and investors) against losses and delays in payment on the receivables or other shortfalls of cash flow. The credit enhancement for the notes consists of the reserve account, overcollateralization, excess interest on the receivables and subordination. Excess Spread Net interest remaining after all expenses are covered, which provides extra assurances on an investment by compensating for potential missed future payments. Reserve Account A small percentage of the market value of the deal is set aside to support the outstanding tranches should any disruption in cash flows impact the trust’ s ability to pay its monthly obligations. Overcollateralization The lender constructs the offered bonds such that they will be worth less than the actual value of the pledged assets acting as collateral. Subordination One or more subordinate classes (B, C, etc.) function as protective layers for the senior (A) tranches. If a loan in the pool defaults, any loss incurred is absorbed by the subordinated securities first. The A tranche is unaffected unless losses exceed the amount of the subordinated tranches. Sources: Deutsche Bank, Trepp, JPMorgan. Investment Grade is a bond quality rating of AAA, AA, A or BBB. See diamond-hill.com/disclosures for a full copy of the disclaimer. The views expressed are those of Diamond Hill as of May 2024 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.
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