The growth of asset securitization over the past six years has been, by all measures, impressive. The year 1991 witnessed 103 public market securitized issues aggregating $52.5 billion, compared with six issues and a $712 million volume in 1985.
Not bad. But where do we go from here? Inquiring investors, underwriters, and credit enhancers all want to know. The answer has important bottomline profitability implications for each of them.
It is a fair bet that asset securitization will prosper in the next five years. The structural logic and issuer economics are now well established. The odds are less certain on how that prosperity will be articulated.
For my money, I'll take the position that huge dollar-volume growth is over and is no longer the solitary indicative measure of the asset securitization field's success. Of increasing importance as key indexes of success are the number of issues, new issuer names in the market, and the addition to the types of asset securitized.
To be more specific, asset securitization should now be viewed as three distinct markets, each of which expresses distinct characteristics:
The definitions of these three markets are developed below, along with their general growth prospects for dollar volume, number of issues, and new issuer name potential.
Credit card receivables and auto loans are the No. 2 hard wheat and the No. 2 yellow corn of asset securitization. By dollar commodity measurements, this duo is the market. The $38.6 billion issued in 1991 represented 74% of all asset securitization issuance. What's more, seven issuer names represented 64% of the total. Not quite a Cargill and Continental Grain analogy, but getting there.
Commodities will remain the core of asset securitization, but I see limited percentage growth. So much of the existing portfolios of, say, MNBA and Citibank, for example, have been securitized that a growing percentage of new volume action is now coming from resecuritization activities as the old discreet trusts die scheduled deaths.
The commodity section of asset securitization will continue to command the majority of resources from underwriters and investors but it is not the engine of the past half-decade.
Emerging Asset Class
Three asset types may prove to be the commodities of the future: home equity loans, dealer notes, and health-care receivables.
Volume growth, in dollar and issue terms, has been impressive: $11 billion of securitized home equity loans, in 28 issues, hit the public market in 1991. The number could potentially exceed $30 billion in 1993.
Dealer note securitization may provide significant volume beyond the Big Three automakers next year. Health care receivables have been the exclusive province of the private placement market.
In 1993 we should expect the beginning of a public market for health care receivable issues. Investors and credit enhancers are working overtime to fully understand these assets. Underwriters are in high gear turning out clever enhancements to existing structures. This is the area where dollar volume number of issues and new issuer names can grow.
The world of asset securitization exotics is well removed from the familiar fields of securitized commodities. Where the bulging billion-dollar prospectuses of the commodities herald the well-recognized underwriting names, the exotics are characterized as being often issued by securitization boutiques.
The exotic asset class includes everything beyond the commodities and emerging commodities. Examples of exotic asset types include insurance premium loans student loans, fast-food franchise loans, farm loans, motorcycle loans, and the like. The issues are generally under $75 million in size and are usually privately placed.
The exotics in 1992 will prosper. The dollar volume will grow but not enough to equal a single decent-size credit card deal. The measurement of growth here is absolutely in the number of issues, the number of new issuer names, and the variety of asset types securitized.
The prospects in all three classes for growth is excellent. If, and when, the Securities and Exchange Commission achieves the liberalization of asset securitization registration requirements under the provisions of the Investment Company Act of 1940, this segment of our asset securitization field may boom.
Beyond our basic measurements of growth, the success of the exotica segment has additional benefits to the progress of asset securitization. For one, it provides numerous jobs in the field. Most industries use employment aggregates as a measure of prosperity. Perhaps asset securitization should now consider itself as a separate career path and employment opportunity.
Secondly, the noncommodity application of asset securitization propels the technique into the mainstream of economic activity and thereby provide.9 permanence for securitization as a capital market tool.
These securitized exotic asset types provide very good economics to the issuers. They are profitable efforts. The maximum benefit to the American economy from the efficiency of securitization will be in the application of the securitization technique to the maximum number of asset types. To predict where the growth in asset securitization will be found, we first must concur on what we mean by growth. This writer defines growth as dollar volume, number of issues, new issuer names, and types of asset securitized.
Emerging commodities will provide us with dollar volume growth, new issues and new issuer names. Exotica will provide plenty of new issuer names, but not much dollar volume in comparison with the growth of credit card receivables and auto loans.
The commodity sector, with at least 50% of dollar volume for the foreseeable future, will remain the force in the securitization market. But this sector is no longer the absolute engine of securitization growth.
PAUL B. JENISON Director Mortgage- and Asset-Backed Finance Group Prudential Securities Inc.
Paul B. Jenison is a director in the mortgage-backed and asset-backed finance group of Capital Markets at Prudential Securities Inc.
Mr. Jenison became a leader in the development of consumer securitization at an early date, starting his involvement in credit card receivable securitization in 1986. He has worked with credit card, auto, marine, second-mortgage, lease, and trade-receivable securitization.
Mr. Jenison began his professional career in 1978 with Hartford National Bank in commercial credit, followed by a period with the antitrust division of the U.S. Department of Justice. He subsequently joined MNC Financial, then parent of the MBNA credit card bank, where he held numerous positions in strategic planning, international, comptroller's, and capital markets.
Mr. Jenison graduated from Boston University in 1974 with a bachelor of arts degree, summa cum laude, and was elected to Phi Beta Kappa. He holds a masters degree from Brown University and a master's degree in business administration from the Wharton School.