ABS community gathers in London

The IMN-ESF Global ABS conference was held on London's Edgware Road this week - a far cry from the Palais des Festivals et des Congrès in Cannes last year, but perhaps a more fitting location given the more realistic tone pervading this year's panels. Gone is the "cautious optimism" that was bandied around in 2008; in its place a realisation that the securitisation market is broken and that it won't be fixing itself any time soon.

Panellists at the conference therefore called for European governments to take heed of the US' TALF programme, as lack of funds to purchase assets remains one of the key barriers to a recovery (see last week's issue). Issues over transparency, rating stability and a continued pressure to sell because of bank deleveraging were also cited as continuing problems.

According to Alistair Jeffery, chairman and ceo of Bluestone Capital Management, the shock of 2007/2008 is receding and the market has moved on to begin a five- to 10-year repair project, during which the wreckage can be tidied up. "The distressed debt market will play a significant role in this process and will be at the forefront of bringing liquidity back to the sector," he said. "The key is repatriating assets to cleanse damaged balance sheets and move portfolios to operators that are better equipped to manage them. As RTC drove new issuance after the S&L crisis, so the market is likely to see elements of securitisation technology used to clean up the mess now."

Secondary opportunities
Nevertheless, opportunities still appear to exist in the secondary ABS market. Around 30%-40% of non-retained transactions are now estimated to be distressed under the traditional classification of being valued at 70% of par.

According to Pius Sprenger, head of European ABS trading at Deutsche Bank, European ABS offers significantly more opportunities than US ABS because the US market is much more actively traded and well analysed by a broad investor base, despite having been ravaged by the subprime fallout. "The introduction of the ABX index in the US gave price guidance and allowed a balance between buyers and sellers to emerge. After Lehman's default an already thinly traded European ABS market nearly closed down," he said.

Sprenger added: "I see value in current-pay first cashflow UK non-conforming deals, which are currently trading in the 50s - to lose money on this trade, all underlying loans would have to default with loss severities of 65%. There are also hidden treasures at the A/BBB levels, which essentially represent implicit call options. For instance, German mezzanine SME CLOs are currently trading at 30c at the super-senior level, which implies that eight companies out of 10 will default - which is a highly unlikely scenario."

But Alex Maddox, head of securitised products at Citadel, commented that hedge fund managers are unlikely to get heavily involved in the European ABS market in the near term, especially as when buying an asset-backed bond in the US market it is cheaper and there is a lot more clarity about the product you are buying. Ope Agbaje, director of European fixed income - structured products at Neuberger Berman Europe, agreed: "The key to recovery is still transparency. I just can't say that enough."

Secondary liquidity
At a traders' and investors' roundtable, panellists - when asked how satisfied they are with liquidity in the market - gave answers ranging from two to three out of a possible five. "In the past two to three months, the senior part of the capital structure has been fairly liquid; however, in the mezzanine part of the structure liquidity is still not there," Attilio di Mattia, ABS portfolio manager at Aurelius Capital Management noted.

Paulo Binarelli, CDO portfolio manager and ABS/RMBS analyst at P&G Alternative Investments, concurred: "In the secondary market for mezzanine paper it's difficult to find prices and we have to rely on a small number of counterparties." However, he conceded that he has seen some recent interest in mezzanine bonds in those asset classes where risks are lower and extension risk is very low.

The traders highlighted the difficulty of valuating portfolios. Rob Ford, portfolio manager at Twenty Four Asset Management, said valuations for ABS was always - and still is - very difficult. "It's not a subject you can approach with any benchmarking: this task has only got more difficult as we have gone through the credit crunch," he stressed - citing the wider bid-offer spreads, the large number of new firms trading the bonds and also the number of non-position taking brokers.

When asked if the posting of a trade by a dealer improved liquidity, the consensus among panellists was that it was not very popular, as in some cases a one-off opportunistic trade with a broker, if posted, could move the whole market unnecessarily. "People are posting trades for a reason - generally to benefit their business," Ford continued. "While transparency is very important, while there is any level of opaqueness, posting of trades is not very helpful."

Primary hopes?
Primary issuance of ABS is unlikely to return for the foreseeable future, panellists agreed, as current market clearing levels do not make economic sense for the issuer or for the investor. Significant government intermediation will therefore be necessary in Europe, they said.

The ECB was praised for its efforts in keeping banks going over the past two years with its repo facility, however. Neil Ryan of Wachovia Bank International noted that the number of banks looking to make use of the ECB's repo facility shows that it is a worthy programme. "The ECB has done a lot in this crisis - they were ahead of the curve in the early part of the crisis...we now need to help the ECB as the ECB has helped the market."

Sooner or later banks will have to be taken off the "drip" that the ECB provides. Ryan suggested that the ECB may get private investors involved to ensure a soft landing when the current programme comes to an end. But, he added: "Ultimately, until the private investors' own assets come back to par, they are not going to look at other assets."

Servicing opportunities
In a separate panel, Bluestone's Jeffery noted that there is a risk premium being charged by many investors due to the taint associated with structured products. "This may drive more activist strategies as investors seek to capture value by unwinding structures or lobbying to influence management of the underlying loans," he said.

Jeffery added: "A healthy servicer role should include developing strategies to align their interests with those of investors. In turn, this can be a good way for servicers to invest in the lower parts of the capital structure."

He explained that the asset performance characteristics of whole loans are very sensitive to servicing, so the key is to ensure continued intensive servicing and contingency planning before it's needed. "Servicing fees have traditionally been structured off-market, but in our experience investors are receptive to paying higher fees to ensure that servicers are invested in troubled whole loan portfolios."

AC & CS