ABS market continues to grow despite volatility, says Moody's

Issuance in the US asset-backed securities (ABS) market reached $400 billion last year, with the market growing on average 26% annually since 1986, according to a new report issued by rating agency Moody’s Investors Services.

This contrasts with issuance in the corporate bond market, where 9% average growth has resulted in the same period, Moody's said in its report, 'Issuance Trends in US Asset-Backed Securities'.

But while total issuance trends are upward, individual asset categories are subject to volatility in the volume of new issues, Moody's said. Agency analyst Michael Cie cited the example of home equity issuance increasing by 56% in 2001 due to low interest rates, while collateralised debt obligation (CDO) issuance simultaneously dropped by 32% due to the poor performance of underlying corporate bonds.

Moody’s said the evolution of the market has been spurred by the issuance in esoteric asset types. CDO issuance has grown significantly, with CDOs making up 16% of issuance between 1996 and 2002.

The market’s evolution has also been hallmarked by a reduction in external credit support - 67% of ABS deals used external enhancement mechanisms in the 1980s, versus 30% in the 1996-2002 period. Internal supports including subordination, over-collateralisation and excess spreads have become the credit enhancement mechanisms of choice.