The case for securitized assets

Securitized assets, or structured credit, has always had an uneasy relationship with fixed income (FI) investors. The asset class tends to be misunderstood, due to its complicated structure, or wholly ignored, because of its dominant role in the Global Financial Crisis (GFC). These misgivings are likely why many investors remain underinvested However, we think this caution is unwarranted. We argue that the securitized market has evolved into a robust sector that should be a staple in fixed income portfolios. In a world of greater volatility and dispersion, securitized assets offer an attractive source of yield, stability, and diversification.

Not your pre-2008 securitized debt

While the stigma from the GFC still lingers for some investors, the securitized market has dramatically changed for the better since then. New standards of practice to enhance robustness were drawn up with the Dodd Frank Act and Basel III. This includes the requirement that originators retain a 5 stake in transactions, virtually removing the ‘originate to distribute’ model. Disclosure requirements have increased, ratings agencies have been reformed and there is significantly more credit enhancement than there was a decade ago. Lastly, the securitized market is no longer over levered as was the case pre GFC. As a result of these reforms, confidence in the market has returned, and annual issuance volumes for global ABS and CMBS have nearly recaptured average pre GFC levels.

A robust and growing market

In addition to nearly recapturing pre GFC average issuance volume, the securitized market has forged ahead with newly emerging sub sectors, such as Single Asset/Single Borrowers (SASBs), Commercial Real Estate Collateralized Loan Obligations (CRE CLOs) and more esoteric categories of ABS such as solar loans or cell phone tower securitization. Issuance trends have also shifted in recent years, with CMBS issuance shifting away from the traditional conduit deals to SASBs and CRE CLOs. In addition, there has been considerable growth in the CLO market for non-traditional investors such as corporate treasurers, primarily driven by the potential of attractive risk adjusted income

Finally, while the applicability of Environmental, Social and Governance (ESG) factors within the opportunity set of securitized assets remains limited, global regulatory initiatives put ESG at the core of the investment industry. As a result, we continue to see collaborative efforts within the securitization and loan industries to improve ESG disclosure and standardize sustainability labelling.

Diversifier and income enhancing

One of the most compelling benefits of securitized assets is their low correlation to other fixed income sectors. This is because of the floating rate nature of most securitized assets, which significantly reduces interest rate sensitivity. Additionally, securitized assets amortize and pay both interest and principal over time. This means the potential additional benefit of steady income, cash flows and liquidity regardless of market conditions.

Additionally, the securitized sector may possibly offer attractive income relative to other fixed income assets with a similar credit rating. This is true for the top of the capital stack, senior rated tranches, and lower rated securities. For example, when the CLO market reached a record issuance volume of more than $160bn in 2021 nominal spreads for AAA rated CLOs, which have never defaulted, remained elevated around 190 bps, while the OAS for AA rated CLOs was around 260 bps as of June 30 2022 In contrast, the average option adjusted spread (OAS) for AAA and AA rated IG corporate credit during the same time frame, was 71 bps and 88 bps, respectively, according to S&P Global Market Intelligence.

Why BlackRock for securitized assets?

Securitized assets are the foundation upon which BlackRock was founded. The asset class and its underlying structures were the main impetus in establishing a firm that can provide a transparent platform which appropriately assesses their risks. The firm’s Securitized Assets team focused not only on the broadening of its investment and sourcing capabilities, but also on the fostering of relationships with dealers, issuers and sponsors in the process BlackRock’s 30+ year track record of managing Securitized Assets has been possible because of the team’s rigorous quantitative, qualitative and analytical approach that is deeply rooted in the firm’s history.

These longstanding relationships became pivotal in distressed market conditions such as 2020-21 as they granted access to pre negotiated or locked up “club deals” or receiving reversed inquiries from counterparties seeking trustworthy investors to invest in their deals.

Being a participatory investor in these opportunities allows the team to determine sizing and tailor their demand structure for specific opportunities. When the opportunity is sizable (ex. Private Student Loan ABS) or esoteric (ex. Solar ABS market), the ability to be more customized proves advantageous, often allowing us to lock up deals at attractive spreads.

BlackRock’s Securitized Assets team incorporates ESG impact as part of its analysis of the economic impact of its investments, believing that integrating ESG considerations into the investment process is both integral to enhancing the long-term risk-adjusted returns of clients’ assets through the investment cycle and an essential component to risk management. The co-heads of the Securitized Assets team and the lead portfolio managers of each subsector are responsible for ensuring that ESG factors and risks are integrated into their respective investment processes.

With $102.52 billion of assets under management (“AUM”)  in securitized assets as of June 30 2022 and an investment team that has worked together for over a decade, BlackRock’s global securitized assets team has the size and track record to navigate diverse market conditions and uncover new opportunities.