EM securitisation challenges investors, but opportunities can still be found

The once-predicted boom in emerging market securitisation may have slipped back over the horizon. But, as discussed in an extensive new SCI Special Report, opportunities remain for investors if they know where and how to look. The full report can be downloaded at the bottom of this page.

Indeed, emerging markets would seem a logical space for structured credit and ABS investors to look for yield and, indeed, product amid a continuing difficult market. However, the EM sector has been equally hard hit in recent years and what was once predicted to be a booming global new issuance market has reverted to a trickle of deals in select countries.

Equally, non-specialist EM securitisation investors remain faced with the perennial challenge of having to understand unfamiliar jurisdictions, while many traditional EM investors need to first get to grips with unfamiliar structures even if they can be swayed away from non-structured investments, which are currently offering better returns.

But, for those with both kinds of expertise, there are still opportunities. It is a question of being in a position to look at emerging markets globally and, for the timebeing at least, having some patience.

Raymond Zucaro, managing principal and portfolio manager at SW Asset Management, says: "We haven't done a great deal in the securitisation space in 2010 because, frankly, there is not a lot of issuance. A recent exception was a lightly structured deal brought from Argentina - the US$300m Aeropuertos Argentina 2000 10.75% of 2020, arranged by Credit Suisse and Morgan Stanley - which we did participate in. But, for the most part, we are just not seeing the flow on the new issuance side of real asset-backed deals that we were seeing two years ago."

Opportunities are limited on the CDS side of the market as well, according to David Hinman, cio at SW Asset Management. "CDS activity is sporadic and heavily sovereign-oriented obviously, which doesn't suit us as we mainly focus on corporates. Further, some areas that have been historically active, such as the Chinese property sector and EM financials - especially the banking and broker-dealer names - used to be a little more active."

Brigitte Posch, emerging markets portfolio manager at PIMCO, finds that there is much more liquidity in pure corporate instruments. "Everything that is senior secured or senior unsecured bank financing is really where we focus on and the majority of our investments are made," she says.

However, there are securitisation opportunities out there in specific countries around the globe. From PIMCO's perspective, Posch says the opportunities are most likely to come from the Latin America region.

"That's where we expect to see more ABS and infrastructure-type securitisations than any other region. The main reason for this is that they have more developed local capital markets and more sponsorship from local institutional investors. The development of local capital markets provides liquidity for securitisation, even though, of course, it remains a relatively small product," she notes.

MP