As one of the structured finance industry’s most important events on securitization and lender finance, this year’s ABS Vegas 2016 sparked thoughtful conversation among attendees. A full spectrum of industry participants was represented at the three-and-a-half day program including investors, issuers, financial intermediaries, regulators, technology firms, servicers and trustees. See below for our top five takeaways from the conference, as well as what we heard from other industry experts.
1. Mixed verdict on the economy – At ABS Vegas 2016, the largest annual gathering for the securitization industry, some speakers pointed to solid U.S. economic fundamentals, such as employment and consumer confidence. However, many others voiced concern about the economy weakening and the threat of global recession, in particular the historic negative interest rate conditions in parts of Europe and Asia. Keynote speaker Mohamed El-Erian, chief economic advisor at Allianz, warned of a potential major downturn and market instability unless global policymakers take strong action. Despite the uncertain picture for the overall U.S. and global economy, respondents to a Capital One survey of ABS Vegas participants continue to be neutral to positive about the prospects for the ABS market in the year ahead, with nearly 80 percent of respondents saying they expect buy-side interest will increase or remain the same in the coming year – signaling that ABS securities should continue to be a solid financing alternative for financial institutions. In addition, more than half of respondents see competition in this asset class increasing in the next year, an indication that market participants aren't pulling back in a material way.
2. Regulation blues – A recurring theme throughout the conference was concern about the impact of new regulations across the ABS market. With a host of new regs in the mix, from risk retention to new transparency and reporting standards and beyond, conference speakers and participants expressed worries that the new rules could cut into the availability of capital, drive up borrowing rates and limit credit supply. According to Capital One’s annual ABS Vegas survey, nearly 70 percent (68%) of respondents say increased regulatory requirements and expenses are the biggest risk facing their business this year, followed by limited access to credit (17%) and additional increases in interest rates (14%).
3. Fear and awe of the marketplace lending model – Panel speakers continued to praise marketplace lenders for disrupting the ABS market and providing a well-needed alternative source for capital for small and medium sized businesses, as banks continue to upshift to bigger borrowers. In fact, 41 percent of respondents to Capital One’s ABS Vegas survey said they expect marketplace lending to have the biggest percentage growth over the next 12 months. (Auto finance came in second place at 12%, followed by credit card and esoterics at 11% each, residential mortgage at 10%, consumer loans and other consumer debt at 7% each, and equipment finance at 1%). However, while marketplace lending is winning high praise for innovation, there is a growing level of unease with the fact that the model is young and untested during a bear market, especially in light of the market’s rocky start to 2016.
4. Liquidity anxiety continues – Conference speakers and participants alike bemoaned the tight liquidity environment, blaming it on a host of issues, from new regs, to market consolidation to credit quality. The number of respondents expressing concern about limited access to credit more than doubled – from 6 percent in the 2015 survey to 17 percent this year.
5. Concerns about credit quality – A number of speakers at the conference worried that credit quality could be weakening – a sentiment echoed in our survey. Fifty-four percent of survey respondents said they expect declining credit quality in the underlying assets to be securitized vs. 32 percent who believed credit quality will remain the same. Those surveyed were also much more likely than those a year ago to think that issuers of ABS securities will tighten their underwriting standards (66% in 2016 survey, increasing from 11% in 2015 survey).