Securitization exists in the public consciousness primarily as a shadowy corner of the capital markets in which out-of-control financial engineering causes global economic meltdowns. Could it be due a reappraisal?
Most people, when they think of securitization at all, think of the mortgage-backed deals that were at the heart of the financial crisis of 2008 and 2009, having perhaps learned how they work through the movie adaptation of Michael Lewis’s book, ‘The Big Short.’
The mortgage-backed bond was first cooked up in the late 1980s by cheeseburger-chomping, cigar-puffing traders at Salomon Brothers, according to Lewis’s account in his earlier memoir, ‘Liar’s Poker’.
Since then, ABS bankers have undergone something of a makeover. The obese, obscene pranksters of yesteryear are largely gone, and in their place is an increasingly diverse cohort of wholesome, immaculately attired and unfailingly professional men and women.
Mirroring the evolution of the ABS banker, the product itself has also transformed into something almost unrecognizable. The mortgage-backed deals are still there, sliced and diced into a credit ratings salad to suit the tastes of every investor, but these days they are joined on the menu by a wide range of other dishes – whose ingredients include everything from credit cards and student loans to the royalties from David Bowie records.
The power and utility sector, not wanting to be left out of the action, joined the party in the late 1990s with “stranded cost” bond offerings which were used to compensate utilities for assets rendered uneconomical by deregulation.
More recently, the ABS market has grown a social conscience with “green” offerings in the form of bonds backed by residential solar leases, loans and power purchase agreements. Could securitization finally save the world, instead of blowing it up?
New variations of the utility securitization also continue to pop up from time to time. Southern California Edison, for instance, is the first company to take advantage of California’s new Securitization Law, which allows utilities to recoup the costs of upgrading the grid to mitigate wild fire risk (PFR, 2/18). Another worthy cause.
In Latin America, power generators bearing the brunt of a price freeze designed to alleviate the cost of living for Chileans were recently rescued by a securitization of deferred receivables arranged by Goldman Sachs with considerable input from IDB Invest (PFR, 2/9).
All of which raises several questions. Will securitization finally be lauded as the hero of the story? Is there any problem it can’t fix? What about upgrades to enhance grid reliability in Texas?
“That could be something where the [Public Utility Commission] says it’s reasonable that you’re going to want to recoup those costs through securitization,” says an ABS banker (well, he would, wouldn’t he?). “It’s an expanding universe, so, obviously, we’re always looking.”