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February 07, 2020  

Coronavirus Sparks Securitization Concerns

The coronavirus outbreak is beginning to take a toll on the securitization industry.

Even as asset- and mortgage-backed bonds and collateralized loan obligations continue to flow, industry professionals say that behind the scenes the virus is impacting the routine business of getting deals done.

Case in point: After the U.S. Department of Health and Human Services declared a public health emergency on Jan. 30, a number of asset-backed bond investors refused to meet with members of roadshow teams that had traveled to China or Hong Kong in the previous two weeks. “They told us they’re not allowed in the building,” one banker said.

There are also fears that the virus could cause disruptions in supply chains for some bond issuers, potentially cutting into deal volume.

Consider bonds backed by payments from individuals who buy mobile devices via installment plans. Many customers use Apple iPhones that are predominantly made in China, and concerns are growing that future shipments to the U.S. could be upended. Foxconn, Apple’s manufacturing partner in China, is among the many companies that have temporarily shuttered factories.

In a Feb. 2 note, TFI Securities’ top technology-company analyst, Ming-Chi Kuo, said he is slashing his forecast for first-quarter iPhone sales by 10%, to between 36 million and 40 million units, in part because of the possibility of supply-chain disruptions.

While China’s factory closures have so far had little to no impact on U.S. automakers, which are frequent issuers of asset-backed bonds, there are worries about shortages of parts should the virus continue its rapacious spread.

Signs of trouble already are evident in South Korea, where Hyundai this week said it was temporarily halting production at its factories, citing a shortage of key parts made in China. Hyundai is a routine issuer of asset-backed bonds in the U.S.

Issuers and buyers of aircraft-lease bonds also are keeping a close eye on the developments. Many airlines have indefinitely suspended travel to and from China. A lengthy crisis could cut into leasing activity, which could in turn diminish the supply of collateral available to underpin new bond offerings.

To date, the virus hasn’t affected the pricing of new auto-loan or aircraft-leasing securitizations.

The crisis has had a more direct impact on securitization conferences.

The Structured Finance Association is canceling a China panel at its “SFVegas 2020” conference, which runs Feb. 23-26 at the Aria Resort & Casino in Las Vegas. SFA executive director Michael Bright said Chinese registrants are unlikely to attend in light of the U.S. government’s decision to deny entry to foreign nationals who recently traveled in China. “Given that Chinese nationals may have difficulty traveling, we will likely not be holding our roundtable on China securitization and will look to reschedule that,” Bright said.

More than 8,000 market participants are expected to attend the conference. Though no coronavirus cases have been reported in Las Vegas, Bright said the hotel is nonetheless taking unspecified precautions recommended by the Centers for Disease Control and Prevention.

Information Management Network, meanwhile, has postponed its “Global Investors’ Conference on Securitization,” which was scheduled for March 27-28 in Beijing. More than 1,000 people had registered for the event, which was being co-hosted by China’s leading securitization group, CAF 100. The conference now is likely to be held in the third quarter.

There have been more than 28,000 confirmed cases of coronavirus infection in China, with more than 560 deaths.