Vito Sperduto
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value in an ever changing world. I'm Vito Sperduto, head of RBC Capital Markets, US, and today I'm joined by two leaders of RBC asset backed securities team. Sofia Shields heads our US Consumer ABS securitization financing business. She's had a storied background in the business, having joined RBC as an analyst over 25 years ago and risen through the ranks to run one of the most successful securitization franchises on the street. And I'd also like to welcome Nick Rogers, who leads our Non-Traditional ABS origination business. Since joining RBC in 2015, Nick has built a market-leading securitization team for assets spanning transportation, renewables, equipment, single family rental and communication infrastructure.
Vito Sperduto
Well, Sofia and Nick, welcome to the podcast. Great to have you both joining us today.
Nick Rogers
Thanks, Vito.
Sofia Shields
Yes, great to be here, Vito.
Vito Sperduto
So in this episode, we'll explore how macro trends are opening new opportunities in the asset backed securities and structured credit market, with a focus on key sectors. We'll also take a closer look at recent deal activity and the forces driving momentum in this evolving space. So why don't we get going and Sofia, let's start with you. Just on a high level, can you provide an overview of the ABS business here at RBC and how the market has evolved? What are the key areas of opportunity and how's RBC positioning itself to meet shifting client demands?
Sofia Shields
Yeah, Vito, great question. I'll give a bit of background, so to kind of frame our discussion here. RBC has been in securitization business for over 30 years. We initially entered it on the financing side, established asset backed commercial paper programs as far back as 1994. So today, that business provides financing to about $55 billion worth of commitments, and it's over 240 distinct transactions, really spanning the globe, all the major geographies. Now coming out of a great financial crisis, RBC was able to leverage that business and its strong position, and know-how and move into the capital markets ABS, by bringing onboard some of the top talent displaced on the street at that time. Since then, the growth has been very robust, and we continue to adapt and innovate in the face of a changing marketplace. So as we're talking about capital markets ABS today, the total US ABS market has more than doubled to about $330 billion since the global financial crisis, and the mixture and the types of assets being financed has expanded and changed over that time. So new asset classes emerged in the esoteric space, and there have been new developments and product offerings in the traditional consumer space as well, in addition to just overall greater refinement to structures to maximize efficiency, credit protection and utility to the issuers. With all that, RBC continues to be well positioned to take advantage of a growing market and has consistently maintained its position at the top of the league tables, commanding anywhere between 5 to 9% market share over the last decade.
Vito Sperduto
Sofia, that's great background, especially with the strength of the RBC position. I had not realized that the market had doubled since the financial crisis. That's a pretty impressive amount of growth. But Nick, let's turn to you. We're still in the early days of the new US administration here. What are some of the key concerns you're hearing from clients in the ABS space, and how might policy changes affect the market?
Nick Rogers
The new administration is very topical. The Inflation Reduction Act is top of mind for our residential solar clients, since the 2022 law extended existing tax credits for new solar installations and added further credits to encourage US manufacturing of panels and installation in low- to middle-income communities and other communities. And so a repeal of the law would increase new installation prices. It would reduce volumes, which could be exacerbated by tariffs on imported panels. Tariffs also disrupt global trade, which can actually be a short-term positive for our shipping container lessor clients. Container shipping is designed for very efficient movement of goods, and so when trade policy causes a shift of import volumes from, say, China to Southeast Asia, more containers are needed to handle the same goods coming into the United States. So our container lessor clients see increased demand from their shipping liner clients. That drives prices of new containers higher. It drives higher prices for renewals on leases of existing containers. And all of that inefficiency just adds to the inflationary pressures felt by US consumers.
Vito Sperduto
You know, look, we're sitting here in a position today where the Fed is basically signaling that they're paused going forward. We saw some cutting in the latter half of ‘24 and certainly that's, you know, changed almost on a dime at this point. But you know, how is this macro-economic environment influencing ABS issuance, investor appetite and credit risk in your world?
Sofia Shields
Yes, so Vito, I guess if we're going to talk broader economic trends, you know, the one that obviously jumps to mind is inflation, and its effect on our market is quite nuanced. So I would say inflationary impacts on asset prices really have a dual effect of producing greater volume of assets available to be securitized and put into our deals, while at the same time potentially introduce stress in consumer credit that needs to be monitored and addressed via ABS transaction structures. I think a good example of that, and I think everybody can relate to that, is the overall increase in consumer auto transaction prices, which really supports the growth of auto ABS. And to put some numbers to it, the auto related ABS issuance was about $150 billion in 2020 and then 2024 that sector achieved nearly $220 billion. And it continues strong growth here in January.
Nick Rogers
Yeah, today's investor base is largely “risk on.” Macro views of economic strength encourage investors to seek yield in new sectors and in lower rated notes. The capital raising success, as we've seen over the last year plus, for issuers across the board, and certainly within the non-traditional or esoteric space, has led to plans for larger and more frequent issuances in the ABS market. And so I'd say all of this, interestingly, co-exist with uncertainty over tariffs and uncertainty over other business-sensitive policy changes that could be around the corner.
Vito Sperduto
Well, let's take a look at, maybe a little bit at the activity in your market by sectors, and look, when I think about the items that are impacting activity across the financial markets, oftentimes, I'm thinking about the disruptions to the global supply chain. Obviously today, tariffs are top of mind, or geopolitical conflicts. I mean, those are all factors that impact a lot of the key sectors that are important in your world, you know, like energy, semiconductors, shipping and the like. So maybe, can you talk a little bit about which of these sectors are experiencing the most growth, and what are some of the items that are impacting them?
Sofia Shields
Maybe I'll start on a consumer side. And you know, what we’re really seeing there is continued innovation on the product side, so new methods and channels of offering consumer credit. So think point of sale lending that allows consumers to make purchases and pay for it over time. So products such as pay-in-four that really weren't around just until very recently, then there are new ways of adjudicating credit. So think AI underwriting, machine learning, and ultimately, all of that together results in delivering better, and I would say even more importantly, better priced products to the end consumer. Interestingly, Vito, the consumer marketplace loan related issuance was about $10 billion in 2020 and it has doubled over four years, reaching roughly $20 billion in 2024 and within that volume, point of sale and home improvement sub sectors, which are the newer sub sectors, went from about a billion and a half to over $7 billion in 2024.
Nick Rogers
That's right, Sofia, we see investors use ABS to express their credit view in these emerging trends, and that can be AI, be it in data center or fiber ABS. It can be with energy for solar ABS, or it can just be the shift from single family home ownership to single family rental, which we see in the SFR ABS space. Maybe just to focus on one example. Historically, the solar ABS market, and particularly for loans, was predominantly comprised of thinly capitalized fintech lenders with a sector equity value today, probably in the low single digit billions. RBC recently partnered with two newer solar originators who are reshaping the market as sole lead on their inaugural securitizations in the last 12 months. The first Everbright which is part of NextEra, the world's largest generator of renewable energy and owner of the largest electric utility in the United States. The other is EnFin, which is a subsidiary of Qcells, that's the leading manufacturer of solar PVs in the United States with a massive and expanding production facility here in Georgia. So while fintechs helped to start the rooftop solar energy revolution, these global players are positioned to accelerate it, both growing the pie and also taking significant share, all of which I think is going to make the next five years very different than the past five years for a financing market that's right at the center of energy innovation, and certainly for the ABS market that funds it.
Vito Sperduto
That's great Nick. You mentioned, you know, solar and renewable energy ABS, which has been a rapidly evolving sector. What differentiates our approach in this space? And you know, how have these recent inaugural deals helped to position us as the leader in structured products there.
Nick Rogers
Our activity has placed RBC in the center of the solar ABS market, giving us, I think, greater visibility than our peers, into investor appetite and into their credit sensitivities. RBC is number one in solar ABS league tables last year with having raised nearly $3 billion for four of the most active names in the space. And that's broader and deeper experience that we bring to bear for our issuer clients when we help them return to the market.
Vito Sperduto
Nick, as you know, and as we've discussed often, the regulatory environment is a key consideration for our clients, and it's probably one of the more important areas in today's world. And so as you think about navigating regulatory and financial complexities across the ABS market, how does RBC help clients mitigate risks while ensuring successful market entry, and also how do we play a role with our expertise in ESG financing to help clients overcome these hurdles?
Nick Rogers
Right the regulatory and financial complexities, they're just the reality that we have to navigate for our clients every day. We led over 80 securitizations last year in the capital markets across 17 asset classes–that gives us real confidence to identify what can be successfully executed in the market. You know, we've developed viable regulatory solutions, we've negotiated ratings and legal complexities, and we've connected issuers with new pockets of capital, all of which informs the financing solution we're going to develop next for our clients. And thinking again, more specifically within ESG, I'd say, you know, the financial imperatives often stand taller than the mandate. To accelerate an energy transition, we need the math to work for buyers and sellers of capital, and so developing the right legal and capital structure for each client and expanding the investor base through constant education, bringing people up to date on changes in regulatory policy, changes with our issuers and so on, that's critical to keeping the market going as smoothly as it is.
Sofia Shields
To add to that discussion, there's certainly been a lot of regulatory changes in the wake of the great financial crisis. In a lot of ways, there is greater transparency and disclosure of which parties have the ultimate, what you might call, skin in the game, which I think buttresses the alignment of interest. Especially in newer asset classes, we always look to fold in the expertise that RBC already has across its vast network. So a good example of this is the internal collaboration of our ABS team, DCM team and sustainable finance group on the rate reduction bond asset class, which often falls under the green bond category. That sector has grown significantly, with over $30 billion of rate reduction bonds priced between 2021 and 2024. And RBC is a key player in this space, with four book runner roles in 2024 out of seven total deals in the market.
Vito Sperduto
Well, Nick, we're always talking about, how do we expand the list of traditional clients in our spaces across the firm? And so, as you're thinking about this in your world, what types of non-traditional ABS clients are we targeting, and what unique challenges or needs do they have?
Nick Rogers
Yeah, we're today active across a range of sectors in non-traditional or esoteric. Pick your term for it. That includes transportation, renewables, real estate related assets, communication infrastructure, royalties and various equipment, from either consumer assets like wireless handsets to large commercial assets like manufacturing equipment. Some of these industries are highly cyclical, like trade driven shipping container, while others are benefiting from kind of macro mega trends like the AI driven data centers and fiber. But what they all have in common are, these are assets that generate strong, contracted cash flows. And so, while the size of each of the sectors is perhaps small compared to the benchmark ABS, like autos or student loans, and consequently, the credit story can be more niche, and the bonds see reduced liquidity compared to those asset classes, the fundamentals that Sofia mentioned earlier remain: we apply securitization technology to separate asset risk from originator risk, and so we can offer investors a broader array of risk-reward profiles, and offer issuers both lower cost of funds and greater leverage. And that makes the juice worth the squeeze in our market.
Vito Sperduto
You know, we're always trying to innovate for our clients, not just a simple, you know, ABS or banking 101, and certainly, innovation makes a difference. But how are we tailoring the solutions that we're offering to our clients to meet the specific needs of those clients in your space?
Sofia Shields
Vito, it almost sounds very basic, but we always start with getting to know the client, yes, I think it is, you know, securitization 101, banking 101. I mean, ultimately, it's an iterative and cooperative process, both internally and externally. We reflect the feedback from the client, the rating agencies, investor preferences, all of that kind of goes into baking the pie. You know, with new products and new ways to deliver those products, we continue to incorporate these products into our structures, while at the same time being watchful of the performance over time. And as the performance history improves and more data becomes available, we then help our issuers to optimize those structures to become more efficient, which then results in better execution, ultimately better utility, to a client, while at the same time providing the necessary protection to the investors, which is very important. We collaborate very closely with our colleagues across the RBC platform, and that allows us to deliver bespoke end-to-end solutions. So our multi-faceted team approach really results in better structures and lower cost of funds for our clients. And, you know, kind of going back to the example I gave earlier in the rate reduction bond sector, we have both ABS and DCM sale and syndicate desk’s participating from deal inception through pricing. Most of our competitors would have one or the other, and thus we reach the broadest possible pool of investors, resulting in the most efficient bond structure and the lowest cost of funds. That's just one of the examples that readily comes to mind.
Nick Rogers
Right… I think the key to all of this is leveraging the team's deep experience in consumer and non-traditional sectors, developing new solutions for new problems, and whether we're introducing a new ABS asset class or bringing a first time issuer with a differentiated product to market, or restructuring the largest ABS program on the globe, RBC has been a leader with a reputation for unique financing solutions.
Vito Sperduto
Well, Sofia, Nick, thank you for being on the podcast.
Nick Rogers
Thank you for having us.
Sofia Shields
Thank you for having me, Vito.
Vito Sperduto
As I hope you took away from the conversation today, we highlighted RBC’s leadership and expertise in the ABS market. And as I think about it's really built on the fact that we have a top tier securitization franchise consistently ranking among the leaders in both traditional and non-traditional ABS with a strong presence across consumer, transportation and renewable energy sectors, and we're driving innovative solutions in a complex market for our clients, whether it's navigating shifting monetary policy, geopolitical risks or evolving regulations, our ABS team delivers tailored, forward-thinking solutions that help clients optimize funding, expand investor reach and capitalize on new market opportunities.
Vito Sperduto
You've been listening to Strategic Alternatives, the RBC podcast. This episode was recorded on January 30, 2025. You can listen and subscribe to Strategic Alternatives on Apple podcasts, Spotify, or wherever you get your podcasts. If you enjoyed today's episode, please leave us a review and share the podcast with others. Thank you.