đŹSecuritization Run Amok (Long the ABS Market)đŹ
On Sunday, in âđ„Securitize it All, We Sayđ„,â we continued our ongoing âWhat to Make of the Credit Cycleâ series with discussion of, among several other things, Otis, a new startup that intends to securitize cultural assets and collectables like sneakers, comic books, works of art, watches and more. We quipped, âWhat isnât getting securitized these days?â If we do say so ourselves, that is a: GOOD. EFFING. QUESTION. Why is securitization all of the rage these days? EVEN. BETTER. EFFING. QUESTION. The answer: YIELD, BABY, YIELD.
Back in early June, Bloombergâs Brian Chappatta reported on the rise of âesoteric asset-backed securities known as âwhole business securitizations.ââ Restaurant chains with large swaths of franchisees, long-standing operations, and dependable brands, he wrote, are using these instruments to access cheaper financing in a yield-starved market. He wrote:
The securities are about as straightforward as the name implies â franchise-focused companies sell virtually all of their revenue-generating assets (thus, âwhole businessâ) into bankruptcy-remote, special-purpose entities. Investors then buy pieces of the securitizations, which tend to have credit ratings five or six levels higher than the companies themselves, according to S&P Global Ratings. Creditors take comfort in knowing the cash flows are isolated from bankruptcy.
Cumulative gross issuance of whole-business securitizations reached about $35 billion at the end of 2018, compared with about $13 billion just four years earlier, according to S&P. The past two years have been banner years for the structures, with $7.9 billion offered in 2017 and $6.6 billion last year, according to data from Bloomberg Newsâs Charles Williams.
These structures are contributing to the deluge of BBB-rated supply.
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