Sales of bonds backed by everything from timeshare rentals to shipping containers to entertainment royalties are poised to rise this year as investors seek to boost returns with interest rates at about record lows.
So-called esoteric asset-backed securities issuance may soar 12.9 percent to $35 billion, compared with debt linked to more traditional collateral such as auto and credit-card loans, which will grow 8.75 percent to $87 billion, according to a forecast from Credit Suisse Group AG.
Barclays Capital, Citigroup Inc. and Wells Fargo & Co. are directing investors toward the debt with Federal Reserve Chairman Ben S. Bernanke pledging to keep benchmark interest rates, held at zero to 0.25 percent since 2008, “exceptionally low” through mid-2013. Investors willing to hold BBB rated bonds backed by franchise royalty fees of the Sonic Corp. fast-food chain may receive as much as 2 percentage points more annually than similarly rated securities tied to auto loans, according to Barclays Capital’s Cory Wishengrad in New York.
“The ability to pick up incremental yield while not taking additional risk makes esoteric ABS attractive,” Wishengrad, co-head of securitized products origination, said in a telephone interview. “Given the low-rate environment, investors view moving into less traditional asset classes as more attractive.”
Esoteric bonds make up 16 percent of the $620 billion market for asset-backed securities outstanding, with debt tied to credit card, student and auto loans accounting for the rest, according to data from Wells Fargo.
Cronos Containers Ltd. boosted the size of its November offering of bonds tied to shipping container lease payments by $50 million to $200 million, according to data compiled by Bloomberg. An A rated $170 million portion maturing in five years priced to yield 5 percent.
The sale marked the first issue of asset-backed notes for the Marlow, U.K.-based provider of equipment services to ocean carriers, Peter J. Younger, president and chief executive officer, said in a statement on Dec. 7.
Elsewhere in credit markets, a benchmark gauge of company credit risk in the U.S. rose from a two-month low, with the Markit CDX North America Investment Grade Index climbing 1.3 basis points to a mid-price of 119.4 basis points as of 12:01 p.m. in New York, according to Markit Group Ltd.
The credit-default swaps index, which typically rises as investor confidence deteriorates and falls as it improves, reached the lowest since Oct. 28 yesterday. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Fannie Mae, the government-supported mortgage-finance company, will start offering loan-level data for its securities tied to single-family homes.
The disclosures will start this quarter and begin with newly issued bonds, the Washington-based company, which guarantees almost $2.7 trillion of mortgage-backed securities, said in a statement dated yesterday and posted on its website.
The company will follow competitor McLean, Virginia-based Freddie Mac in offering data on the individual mortgages underlying its securities.
“Release dates for each phase” of the expansion of its disclosures “will be announced closer to their implementation date,” the company said.
WCA Waste Corp., the non-hazardous solid waste management company being acquired by Macquarie Infrastructure Partners II, is seeking $325 million in loans to support the acquisition, according to two people with knowledge of the matter.
Credit Suisse and Macquarie Group Ltd. are providing the financing, which includes a $275 million term loan and a $50 million revolving line of credit, said the people, who declined to be identified because the deal is private.
The transaction, which is expected to be completed in the first half of this year, is valued at $526 million, according to a Dec. 21 statement. MIP II, an infrastructure investment fund, agreed to acquire all of WCA’s outstanding common stock for $6.50 per share.
Sales of esoteric asset-backed securities, which can be linked to just about any asset that produces a revenue stream, are forecasted to pick up as the U.S. economy shows signs of strengthening. Economists forecast 2.1 percent growth this year from 1.8 percent in 2011, according to a Bloomberg survey.
The market gained attention in 1997 when banks arranged $55 million of so-called Bowie Bonds, tied to royalties from rock icon David Bowie. Other musicians that have tapped the market for cash include James Brown and the Isley Brothers, according to Moody’s Investors Service.
Top-rated asset-backed securities returned 2.8 percent last year, following a gain of 4.3 percent in 2010, Bank of America Merrill Lynch index data show.
Performance of asset-backed portfolios may be improved by 15 percent to 24 percent by adding a mix of esoteric securities including bonds linked to shipping containers and aircraft leases, Citigroup analysts led by Mary Kane wrote in a Dec. 8 report.
Such bonds offer a “collateralized play” on corporate America, Kane wrote. Debt backed by shipping containers is valued from 90 cents to 95 cents on the dollar, the analysts wrote. Aircraft-linked securities range from about 76 cents to 91 cents.
Miramax Cut Offering
“These off-the-run sectors require in-depth analysis, yet the attractive return is worth the extra effort,” they wrote.
Wells Fargo’s recommendations for 2012 include debt backed by timeshare payments and fleets of rental cars, according to a Dec. 6 report from analysts led by John McElravey in Charlotte, North Carolina.
A disadvantage of esoteric bonds for investors is that they can be hard to sell because they don’t trade frequently. As a result, investors require the additional yield, said Barclays Capital’s Wishengrad.
Miramax cut the size of its December sale of bonds backed by a library of more than 700 films and 14 television series as investors demanded higher yields, Bloomberg data show. The producer of films such as “Shakespeare in Love” reduced the offering by $50 million to $500 million.
The offering by Miramax Film NY LLC included $350 million of BBB rated debt that yielded 6.3 percent, according to a person familiar with the deal.
The market for esoteric bonds is set to grow from $31 billion in 2011 even as some segments, such as credit-card debt, shrink, Credit Suisse analysts led by Chandrajit Bhattacharya wrote in a Dec. 7 report.
Credit-card bond sales have plunged as banks turn to deposits for funding, with $19 billion of the debt issued during the past two years, compared with $47 billion in 2009, Bloomberg data show.
“The importance of esoteric ABS has been growing in the primary market as the search for higher-yielding assets continues and supply from other traditional ABS sectors remains tepid at best,” the Credit Suisse analysts wrote.