Utility tariff bonds continue to price wide of other off the run ABS asset classes despite offering investors strong credit and strong fundamentals, according to Wells Fargo Securities.
The widening trend that has driven pricing for the sector, wide of credit card ABS since Q3 2012 means these bonds offer buyers “good relative value” without the need of taking on, “undue risk,” explained John McElravey, head of consumer ABS research at Wells Fargo in a Feb.25, report.
Since late 2012, the utility tariff bond spread differential over credit card ABS has increased to the +4 bps and +6 bps-8 bps on three-year and five-year bonds, respectively.
Pre-financial crisis, in late 2007, the average difference between utility tariff bonds and credit card ABS spreads was +2.5 bps three-year bonds and +2.7 bps on the five-year bonds.
At the height of the crisis, credit card ABS traded much wider than the utility tariff bonds. McElravey explained that the widening stemmed from the servicer risk associated with many of the large bank sponsors of credit card master trusts.
By mid-2010, when market conditions in ABS began to normalize, the spread differential returned to a more normal range. According to Wells Fargo figures, the three-year average spread differential has been +2.3 bps and the five-year spread differential has been just +1.3 bps.
Utility tariff bonds, or rate reduction bonds, have seen little new issue volume over the past two years. McElravey noted that it’s hard to predict what issuance will look like for the sector because utility issuers must go through a regulatory review process before new ABS can come to market.
“These factors create an environment where [utility tariff bonds] spreads tend to trade at a modest concession to benchmark credit card spreads,” he said.
At the end of January,
In 2012, according to figures reported by Wells Fargo, issuance in the sector was $2.5 billion and in 2011, just $207 million was issued.
