TSL TRENDING STORY
Q&A with David Kucera
Dave Kucera, Head of Financial Institutions Group, Capital One, sat down with The Secured Lender’s senior editor to discuss the results of Capital One’s survey at the Information Management Network’s (IMN) ABS East Conference, held September 23-25 in Miami, FL.
By Eileen Wubbe
The survey’s respondents included professionals from across the securitization and financial institutions markets and gauged industry sentiment credit, risk and perceived risks in the industry in the coming months.
Key Insights from the survey included:
- Although there are numerous hurdles facing the industry, ABS professionals elected that uncertainty around regulatory requirements (30 percent), increased credit risk (25 percent) and increased competition (24 percent) pose the greatest challenges for their businesses over the next 12 months. Increases in interest rates was listed as the greatest challenge for only 15 percent of respondents.
- The industry was fairly split on sentiment around when lenders’ interest rates would increase compared to the benchmark rates. Forty-one percent said lenders’ rates will rise at the same time as benchmark rates, whereas 38 percent said lenders’ rates will rise more quickly and 21 percent said lenders’ rates will rise less quickly.
- Of those respondents who indicated they are lenders, 60 percent said they plan to raise interest rates while 40 percent of lenders said they plan to maintain the same rates.
- Mortgage finance (25 percent), unsecured consumer lending (22 percent) and leveraged credit (22 percent) were selected as the top three sectors in which respondents believe interest rates will rise the most in the next 12 months.
- Nearly two-thirds (63 percent) of ABS industry professionals surveyed expect buy-side interest in asset backed securities to increase in the coming year. Thirty-one percent expect them to remain the same while only 6 percent expect them to decrease.
Please provide some background on the ABS (Asset Backed Securities) East Conference for our readers.
KUCERA: ABS East is an annual conference that is for companies that are looking to finance themselves through the securitization market. It’s predominantly a securitization conference with attendees comprising financial institutions, investors, intermediaries, bankers, advisors, and lawyers. It applies to a broad range of companies across the structured credits and the structured finance markets.
Please tell us your overall analysis of the survey? Were there any surprises?
KUCERA: I think the one surprise that we had was that rising interest rates were not as high on the list of challenges as we thought they might be. Respondents were more focused on regulation, which obviously is a big concern for many people, so that is always something that organizations are thinking about and evaluating.
We’re in a pretty competitive market, there’s a lot of liquidity out there. It’s been an increasingly efficient market for many companies to finance themselves, so not surprisingly, we heard that competition’s been rising. You’ve also got technology driving some of that change and competition. That’s a theme we’re hearing and seeing more regularly.
We’ve seen interest rates rise, but it hasn’t shown up directly in a lot of parts of the market. We think that over time it’s likely to have a rising impact in a number of sectors. We’ve been in a pretty benign, low interest rate and not very volatile environment for a long time. And so, as rates rise it will be interesting to watch how customers and borrowers react to it, how lenders react to it, and then how the market reacts from a cost to fund perspective and perceived risk.
Increased credit risk was one of the top concerns for respondents. What do you think is driving this concern?
KUCERA: We generally are still in a pretty benign environment, so in most parts of consumer finance the consumer is doing pretty well, and delinquencies and defaults are pretty low. Those are, in many cases, trends that go back a number of years. The mortgage business continues to de-risk, so the number of delinquencies and defaults in mortgage finance are falling. In unsecured consumer lending, we are generally seeing pretty good performance and delinquencies are pretty low. I think the consumer is feeling pretty good generally.
There are a few pockets that we’re seeing on the corporate side—leveraged credit in particular—where the risk appears to be rising, where there is more leverage in the system and, in some cases, the terms and covenants that lenders are able to get has been declining. It hasn’t shown up as high of a direct risk in terms of delinquencies and defaults, but I think the quality of the exposure appears to be getting a little bit weaker. That may lead to weakening performance over time, and when rates rise, because many companies borrow on a floating-rate basis, their cost of servicing that debt may rise. So that’s an area where we do think credit risk and rising rates can be linked. It’s not showing up directly in a lot of ways, but it can be an indirect risk factor over time.
When can we expect to see the actual effects from rising interest rates?
KUCERA: I think it’s partly how quickly rates are going to rise and the individual situation that a company has. It’s hard to generalize what the timeline is for cause and effect, but the faster rates rise, often the greater volatility is in the market.
Do the results shed any light on the economic outlook?
KUCERA: We’re still in a strong environment generally. The consumer market is healthy and getting healthier. There are more pockets of positive factors than rising risks. Consumer confidence and corporate confidence tend to be pretty high. Tax reform has generally helped companies, so as they’re paying less taxes, they’re generating more earnings, and then they have a question as to what to do with those earnings. We’re starting to see some companies and industries invest further in growth, technology and serving their customers. That has shown up a little bit in equipment finance. Companies are investing in property, plants and equipment. The small business confidence numbers are also generally pretty good, which often leads to further investment.
But, on the other side of that coin is that, as uncertainty rises, it might put a pause on things. It will sometimes delay decision making and the confidence to invest further.
So, I think near-term it’s been all pretty positive but there’s a number of clouds out there, and the question is, what do those clouds ultimately turn into? How big of a risk is it? The economy is coming along pretty well, at least in the U.S., but there certainly are things out there that are worrisome, and people are watching.
Capital One has expertise in ABL and ABS. How could these results affect asset-based lenders and their markets?
KUCERA: One of the things that has been evident the last handful of years is there’s been a lot of money available for companies to get financing on a cash flow basis. Asset-based lending is always a good business, it’s always a core business, though it tends to be a little bit counter-cyclical. In a market where companies can finance themselves without fully encumbering their entire balance sheet, that gives them more flexibility.
If liquidity becomes a little more challenged in the system, you are likely to see ABL continuing to expand and become more prevalent.
What can we expect to see in the near term?
KUCERA: We’re still seeing pretty good liquidity in many markets and increasingly newer companies are able to access the markets at pretty favorable terms. The securitization markets have been open to a widening range of companies and sectors, and we’re trying to help them when it does make sense. There continues to be investor interest from a relatively broad and broadening range of lenders and investors that are looking to make financing decisions. We’re seeing more of that happen and at the moment we think that will likely continue in the near term.
The clouds of uncertainty might change that, but at the moment we see more growth and probably expansion than the alterative. We’re watching things closely.