With spreads for traditional asset-backed securities at all-time tights, we believe carefully researched Esoteric ABS can add value to portfolios.

Traditional ABS spreads for markets such as auto loans and credit cards are currently at or near their all-time tights. Naturally, investors are looking for alternatives to add income to their portfolios. In our view, Esoteric ABS can benefit a portfolio if credit and liquidity risk are properly evaluated. The time and complexities involved with Esoteric ABS have commonly deterred some ABS investors, but with a disciplined credit process, ABS can potentially help generate portfolio alpha.

The current outstanding issuance of Esoteric ABS is around $121 billion, led by the Franchise/Whole Business subsector ($33 billion), followed by Unsecured Consumer Loans ($25 billion) and Aircraft Leasing ($22 billion). The balance of Esoteric ABS includes Device Payment (e.g., Verizon), Shipping Container/Railcar, Timeshare, Solar Lending, Insurance Premiums and a host of other smaller subsectors. This compares to $490 billion for the traditional ABS market.

New issue supply in Esoteric ABS has increased steadily in 2021. In the first seven months of the year, we have seen $37 billion in issuance versus $27 billion in 2019 over the same period. The largest issuance has been in Unsecured Consumer Lending ($9 billion), Shipping Container/Railcar Leasing ($7.2 billion), Franchise/Whole Business ($7 billion), and Aircraft Leasing ($4.5 billion). The recent supply has been well absorbed, with most newly issued transactions moving meaningfully tighter in the secondary market.

Spreads have maintained a tightening trend and secondary flows have picked up throughout 2021. In our view, the opportunity set for Esoteric ABS spans the yield curve out to 10 years within the entire investment grade ratings complex. Longer profiles include BBB- Franchise/Whole Business, with tenors of five, seven or 10 years trading to a yield of 2 – 3%. Shipping Container/Railcar issue single A bonds at +110 to swaps and the much smaller BBB tranche at +160 to swaps. Aircraft leasing also falls in the five- to 10-year part of the curve with exposure to multiple aircraft and airlines in many emerging market countries. Spreads vary widely with post-COVID deals trading tighter than 150 over swaps while pre-COVID bonds are currently at +300 to swaps. At the one- to three-year part of the curve, you have Consumer Lending AAA/AA bonds trading at +35 – 70 over swaps and Insurance Premium bonds trading at +30 to swaps for three-year bonds. AAA Timeshare is trading at +50-60 over swaps and single A Timeshare is at +90-100 over swaps.

We see opportunities to add value on the short end of the curve, where traditional ABS and corporates are near recent tights or just lack supply. We like profiles that are levered to the strong balance sheet of the consumer, with structures that de-lever quickly. Our recent focus has been on Insurance Premium, Timeshare, Device Payment and Unsecured Consumer Loans as we believe they currently offer the best risk/reward.