BOCA RATON, FLA. - Investors sounded off on the increasing amount of extendable paper being offered in the ABCP market during a morning panel discussion at Information Management Network's (IMN) third annual Investors' Conference on ABCP and SIVs, which coincided with ABS East.
"Issuers are telling [investors] to provide liquidity; next they're going to be asking us to administer the programs," said Tim Wilson, a director at Credit Suisse First Boston (CSFB).
Stephen Meier, senior principal at State Street Global Advisors, was less than enthusiastic about the meager yields - between three and five basis points - offered on extendable ABCP relative to the transfer of risk from banks to investors. Something closer to 12 basis points would be a more reasonable reward in light of the risk, Meier said.
Meier is not alone in his complaints. "There is a lot of talk about pricing," CSFB's Wilson said. "Some conniving sell-siders run this through a black-hole' model and say two basis points."
The due diligence for an extendable program is extensive, panelists added. "We have to be comfortable with the sponsor and be sure that the underlying assets have true liquidity," Wilson said.
State Street's exposure to extendable paper is limited, Meier reported, in large part because his team has been unable to get comfortable with the issuing entities. Currently, Meier's fund buys extendable paper from MBNA America Bank's Emerald and Countrywide Home Loan Inc.'s Park Grenada vehicles. In both instances, State Street was already quite familiar with the respective issuers via State Street's previous investments in the issuer's term ABS programs.
Despite their concerns, panelists agreed the market is ripe for growth in this area. State Street's Meier did say that although his firm does not currently have a substantial extendable ABCP position, that could change. "Market forces are in place to see growth in extendable ABCP, which is driven largely by bank capital requirements and accounting treatment," Meier said.
Meanwhile, short duration fund managers are buying more enhanced cash, and are moving away from the 2a7 money market funds. Panelists also noted that increased buyside sophistication is driving investors to look beyond traditional money market vehicles to expand their investment opportunities.
Most of the reaching for yield has been in enhanced cash offerings, one investor added.
However, 2a7 remain the primary vehicle for retail clients, according to CSFB's Wilson.
On the FOMC front, the consensus was that the Fed tightening would continue into 2005. Panelists were anticipating a gradual rise in interest rates in the coming months which is not necessarily viewed as a negative, Meier noted. "The curve has some steepness, so there is an opportunity for investors to step up in the curve," he added.
Meier, however, is not ready to take that step. "There is not a lot out there that's compelling. I'm not getting paid to take that step up," he said.
CSFB's Wilson took a similar stance, and said his defense against the rising rate environment is to keep an interest-rate neutral approach with an emphasis on credit spreads. On the credit curve, three-years are showing the most value, he said, "There is not much there for two-years, and we are not getting paid for the four- and five-year [paper] right now."
The key is to know your customers and how they will react to various credit scenarios, another panelist advised. And tread with caution, he added. "We are starting to see a light at the end of the tunnel - this is the time to survive and get through. Conservatism wins the day," Wilson said.
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