Aegon Is Betting on Sustainability-Minded Securitized Credit

Issuers of structured bonds backed by consumer debt can boost their resilience and outperform in the long run by focusing on sustainability, according to Aegon Asset Management.

Deals backed by private student loans, communications infrastructure and solar loans and leases that are aligned with sustainability goals will outperform, even as consumers struggle to pay bills because of coronavirus, said Jose Pluto, senior structured finance analyst and portfolio manager at Aegon. Those sectors have lower exposure to industries worse hit by the pandemic, like energy, retail, hospitality and transportation, he added.

“They also possess a lot of attributes that are more resilient in the current environment,” said Chicago-based Pluto in a telephone interview July 8. “Borrowers are rapidly realizing that sustainability is something investors and asset owners care about.”

Aegon, which oversees about $395 billion in assets, has exposure to private label student loans via deals focused on borrowers with high debt, substantial income and good track records for repayment. Most of its mortgage-backed security exposure is to high-quality office or multifamily properties, while it avoids retail and hospitality.

In communications infrastructure, Pluto invests primarily in cell tower securitizations, data centers and small cell communications networks. Big data centers serving multiple tenants located in one facility are more resource and energy efficient, he said. Working from home has strengthened the case for stronger, more resilient telecommunications infrastructure, he added.

Aegon picks investments that align with United Nations sustainable development goals as well as climate change, resource sufficiency and human capital.

Closing Up Shop

Sustainability-focused securities aren’t immune to the impact of the deadly virus. Sectors like re-performing residential mortgages and CMBS are poised for mixed results, while small business loans face greater uncertainty, said Pluto.

It’s unclear how offices will be configured when people return to work. Working from home reduces demand for offices, though tenants are going to need more space per employee, according to Pluto. Securitization structures are “pretty resilient” and short-term government support should help the borrowers get through the disruption.

“Buildings with lots of lease rollover in the near term are going to experience some stress and there’s not going to be as much demand for space,” he said.

Small business loans are positioned for greatest uncertainty as obligors are heavily concentrated in sectors hit hardest by lockdowns, Pluto said. Aegon has very little exposure to personal borrowing on online platforms -- marketplace loans -- and has no exposure to aircraft ABS or containers, he added.

“Small businesses with not a lot of capital and not a lot of access to resources may just simply close up shop and never come back,” said Pluto.

Related: Aegon Sees Tech, Pharma Credit as Sustainable Winners From Virus

Powerful Supply Incentive

Aegon expects sales of debt backed by consumer and other liabilities to pick up in the second half of the year. It forecasts $55 billion to $60 billion of private label CMBS issuance in 2020 and about $170 billion to $180 billion for asset-backed securities for the full year, about 27% less than last year.

“The TALF program provides a pretty powerful incentive for issuers to bring deals,” said Pluto, referring to the Federal Reserve’s Term Asset-Backed Securities Loan Facility.

“You’re starting to see new dealer projections for what total issuance volumes will look like and they are definitely going to be down year-over-year but the second half will look more normal,” he added.

©2020 Bloomberg L.P.

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