Investor Appetite for Subprime Debt Continues to Grow

Investor Appetite for Subprime Debt Continues to Grow

ABI Bankruptcy Brief

June 28, 2018

ABI Bankruptcy Brief

Investor Appetite for Subprime Debt Continues to Grow

Below-investment-grade asset-backed securities (ABS) are on track this year to account for their biggest slice of the overall sector since before the financial crisis, Bloomberg News reported. At the same time, the riskiest collateralized loan obligations (CLO) notes are now a larger percentage of the market than they’ve been in two years. The growing appetite for the lowest-rated bonds in the ABS and CLO markets highlights the rabid demand for higher-yielding securities and those with floating rates that offer protection from inflation and tighter monetary policy. But this also leaves these markets more exposed at a time when many analysts see an economic slowdown on the horizon. “From a debtholder’s perspective, I am very wary of these types of lower-rated tranches, as they have been shown to have much more spread volatility and much more rating risk,” said Jason Merrill, a structured finance analyst at Penn Mutual Asset Management, about the collateralized loan obligation and asset-backed securities markets. The supply of below-investment-grade asset-backed securities in consumer categories has been rising for the last two years, with the majority in the form of personal loans, equipment and auto loans, according to Wells Fargo. Subprime auto ABS is the largest category. Companies have sold more than $150 million of B-rated bonds in the sector this year, compared with nothing last year and an annual average of about $20 million since the financial crisis, Barclays analyst Alin Florea wrote in a recent note, though it’s still a small part of the overall market.
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Commentary: Chaos Atop CFPB Could Get Worse After Appeals Court Ruling*

With leadership of the Consumer Financial Protection Bureau already facing plenty of uncertainty, a looming court decision could further upend the calculus of who runs the agency, American Banker reported. The U.S. Court of Appeals for the D.C. Circuit has been deliberating since April on whether Mick Mulvaney can continue as acting CFPB director. The three-judge panel appeared to be skeptical of the claim by Leandra English, the chief of staff under former CFPB Director Richard Cordray, that she is the rightful acting director. But the judges also raised questions about Mulvaney's dual role in running the bureau and the Office of Management and Budget. Lawyers say that while a victory is unlikely for English, they are still preparing for a possible outcome where Mulvaney is disqualified as acting director as well. That could repeat the scenario from last fall where, for a short time, no one really knew who was in charge.
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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.


Banks Failing Stress Tests? Not for Much Longer

The Federal Reserve is moving toward eliminating passing and failing grades for its stress tests of the nation’s largest banks and replacing them with a capital ratio that the lender must meet during the following year, the Wall Street Journal reported. With the second round of stress-test results set to be released, there is still a chance a bank could fail the exam, which tests whether banks could continue lending during a severe recession. As soon as 2019, regulators are likely to turn to the ratio. The changes, set in motion during the Obama administration and continuing under President Donald Trump, reflect the Fed’s uneasiness with surprising bankers and financial markets with bad news, such as Citigroup Inc.’s unexpected stress-test failure in 2014. The modifications also demonstrate how Fed officials have grown more comfortable with big banks’ risk-management chops after the 2008 financial crisis exposed significant weaknesses. Last year, no banks failed, the first time that has happened since the Fed began disclosing annual results in 2012.
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Commentary: Continued Growth of Increased Medical Insurance Deductibles Weighs on Consumer Finances*

A survey by the National Business Group on Health found that 39 percent of large employers today offer only high-deductible plans, up from 7 percent in 2009, according to a Bloomberg News commentary. Half of all workers now have health insurance with a deductible of at least $1,000 for an individual, up from 22 percent in 2009, according to data from the Kaiser Family Foundation. About 41 percent say they can’t pay a $400 emergency expense without borrowing or selling something, according to the Federal Reserve. When one large employer switched all its employees to high-deductible plans, medical spending dropped by 12 percent to 14 percent, according to an analysis by economists at University of California, Berkeley and Harvard. But the workers weren’t learning to shop more effectively for health care. They simply reduced the amount of medical care they used, including preventative care.
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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Analysis: Two Funds Aggressively Targeting Distressed Malls

Namdar Realty Group and Mason Asset Management now own about 100 malls from New York to Utah, and the investment firms have climbed quietly from anonymity to being among the country’s top 20 mall landlords — thanks in large part to an aggressive low-investment business strategy at many of the distressed malls they have acquired over the past five years, Reuters reported. The approach has been aided by a slew of retail bankruptcies and the fast-changing consumer tastes in favor of e-commerce firms such as Inc., offering these two investment firms brick-and-mortar assets at bargain prices. About half the malls Namdar and Mason have acquired are similar to River Oaks in suburban Chicago: They are properties with relatively low sales, sometimes in need of redevelopment and typically located in underdeveloped neighborhoods. More recently, the rest of their mall mix has consisted of healthier, but not high-end, properties as the funds have been trying to improve the quality of their assets. A source with direct knowledge of Mason and Namdar’s strategy said the funds invest as little as possible on many of their properties; the aim is to hold the assets, not redevelop them. The approach is not without its detractors, namely mall tenants and some government officials who were hoping to see more investment in their malls once Namdar and Mason took control of the property. In interviews with Reuters, Namdar and Mason said that the upkeep was adequate and that they do not flip malls, preferring to hold onto them. On occasion, they have sold their least profitable properties to redevelopers. The low rent Namdar and Mason ask for — sometimes only a couple of thousand dollars a month — has helped keep down vacancies at their malls, according to store managers and sources familiar with Mason and Namdar’s strategy.
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Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store.

June 30 Nomination Deadline Approaching for ABI’s 2018 Class of “40 Under 40”

ABI is accepting nominations for ABI's “40 Under 40” program until June 30. This program recognizes outstanding young insolvency professionals who are driven by success, motivated by challenges and are role models for their peers. If you are, or know of, a dynamic insolvency professional who is committed to growth and excellence both professionally and in your community, this is one opportunity not to be missed! Visit the website for additional details on nominations and applications.

Help ABI Learn about Industry Challenges and Trends

ABI recently launched an important study about the state of the insolvency and bankruptcy industry. You should have recently received a few emails (check your spam filter if you have not) from McKinley Advisors, our partner in this research initiative, inviting you to participate in a survey. The scope of the survey is to identify trends and challenges in the industry. Individual responses will be kept confidential, so we encourage you to provide your candid feedback. All respondents who complete the survey will receive a prize and have the opportunity to enter a drawing to win an all-expenses-paid trip to ABI's Winter Leadership Conference this December in Scottsdale, Ariz., or an Apple Watch! As a member, you know the importance of staying involved and active in ABI; completing this survey will better help us serve you in this and other areas of membership.

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New on ABI's Bankruptcy Blog Exchange: Two Native American Tribes to Pay $3 Million in Payday Loan Scam

Two Native American tribes agreed to forfeit $3 million in money they took in for acting as fronts for a scam run by Scott Tucker, a former race-car driver who was convicted of operating an illegal payday loan business, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.


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