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    Structured Insights: esoteric market map

    Structured Insights: esoteric market map

    June 10, 2021 Global macro, Structured credit, Fixed income

    Since our most recent Structured Insights on 2021 opportunities, we have been updating our market model of the structured credit universe and wanted to share the output.

    The structured credit market map

    As a reminder, our structured credit ‘market map’ splits the universe into three regions: ‘core’, ‘alternative’ and ‘esoteric’. We use this classification to help target relative value opportunities and inform portfolio construction within our structured credit client mandates (Figure 1).

    Figure 1: The structured credit market map1

    Core
    ($11trn)

    Alternative
    ($1.7trn)
    Esoteric
    ($350bn)
    Typical Characteristics Typical Characteristics Typical Characteristics
    • Mainstream / on-the-run ABS
    • Included in mainstream indices such as the Agg
    • Includes agency MBS, cards and auto loans
    • Not included in mainstream fixed income indices
    • More credit sensitive US markets such as middle-market CLOs
    • Non-US structured products such as European and Australian RMBS and CLOs
    • Public, 'club' and / or private structured credit formats
    • Unconventional asset types including unsecured consumer debt, cell towers, shipping containers or music/film rights

    Our updated map includes the relative size and components of each market (Figure 2).

    Figure 2: Structured credit market model2

    Structured credit market model

    Esoterics are increasingly in demand

    We estimate the esoterics market (proxied using 5-year trailing issuance) to be over $300bn3. We exclude private market securitization structures from this data which we will explore further in an upcoming Structured Insights.

    Of the three primary market segments, the esoteric component stands out to us. Over the past 5-years, the market has doubled in size, driven by growth in sectors such as consumer finance, container shipping, solar and aircraft receivables4.

    More recently, ever-improving economic fundamentals are also bringing a number of sectors back into play, such as selective aircraft, hotel and rental car fleet securitizations.

    Within these sectors, demand has been insatiable in recent months with deals frequently many times oversubscribed across the capital stack. Demand has been particularly strong for anything consumer-related given the fundamental strength of the US consumer and relative lack of high-yielding supply.

    Aircraft deals, for example, are also coming to market oversubscribed at all tranche levels, albeit demand is slightly lower than consumer sectors as there remains some investor anxiety around the fundamental health of the sector as we emerge from the pandemic.

    However, many areas of the esoterics market have lagged the recovery in more mainstream structured credit markets. As such, from a spread perspective, we feel that esoteric deals have the greatest potential for locking in yields and participating in a potential ‘catch up’ within the structured credit segment, similar to the spread catch-up we saw in the esoteric market in 2020 – see Structured insights: where are the 2021 opportunities? for more information).

    The esoteric market is likely to continue growing

    We are increasingly seeing investors venturing outside of ‘core’ structured credit to seek incremental yield and relative value while diversifying their fixed income portfolios. But we caution that investors need to carefully underwrite each transaction and issuer. These deals are more complex than traditional bond or core structured credit instruments. Careful due diligence on each issuer and deal structure is essential.

    We expect the esoteric market to continue growing as sophisticated, institutional investors such as large life insurance companies become more creative in the never-ending search for attractive, capital efficient yield alternatives and diversification from corporate risk. Furthermore, as once-niche subsectors develop, and issuers come to market more regularly, we are seeing second- and third-tier issuers creeping in. We increasingly see this in parts of the whole business securitization and franchise ABS markets for example.

    In our view, opportunities in the esoteric sector continue to stand out and remain high on our radar for the rest of the year.

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