Market Trends: Structured Finance, Securitization and Derivatives

By: Jordan Yaret, Mikhel Schecter, and Bryant Mendel, Paul, Weiss, Rifkind, Wharton & Garrison LLP

STRONG ECONOMIC GROWTH AND HISTORICALLY LOW interest rates boosted U.S. structured finance issuance to $510 billion in 2017, a 37% increase over 2016 volume. This growth occurred across a wide range of asset classes. Up and down the credit curve, spreads (i.e., the difference between what the issuer receives from the underwriter and what the underwriter receives upon resale) on asset-backed securities (ABS) were stable or grew tighter in both developed and developing markets as demand far outpaced supply. Investors continued their hunt for yield further down the capital stack as well and into the more esoteric corners of the market.

The biggest driver in 2017 was the boom in the collateralized loan obligation (CLO) market. New CLO issuances were the second highest year on record, reaching $118 billion in the United States, up 64% from the prior year. A record number of existing CLOs were refinanced or reset, which in combination with new CLO issuances resulted in total issuances of over $250 billion in 2017. Some industry commentators pointed to the recently effective risk retention requirements as part of the driving force behind such growth; more than 50% of new CLOs complied with the risk retention requirements by retaining an eligible horizontal residual interest in the issuing entity in an amount equal to at least 5% of the fair value of all ABS interest issued as part of the securitization transaction, thereby resulting in less availability for third-party investors.

Another 2017 highlight was the non-traditional ABS sector or so-called esoteric ABS market, which comprises assets other than the usual sources for ABS financing such as auto-related, credit card, student loan, or equipment assets. Overall, the esoteric ABS market was up approximately 41% year-overyear, with issuances rising to over $50 billion. Consumer loan, whole-business, aircraft lease, single-family rental, and mobile device payment ABS led in this market, representing 61% of such issuance in 2017.

To read the full practice note in Lexis Practice Advisor, follow this link.

Jordan E. Yarett is a partner in the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP and is head of the firm’s Securitization Practice Group. Mr. Yarett has over 25 years of experience as a financing lawyer focusing on structured finance and securitization transactions. He has handled both innovative structured finance deals involving unusual asset classes as well as securitizations and bond financings involving a wide range of more traditional assets. Mikhel Schecter and Bryant J. Mendel are associates in the Corporate Department and members of the Finance Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. They focus on representing private equity funds and their portfolio companies in a variety of corporate finance transactions, including leveraged buyouts, debt restructurings, distressed debt purchases, and portfolio company financings.

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