Participants at ABS East held forth on value opportunities in securitization and how increases in interest rates, loosening underwriting standards and the debt ceiling stalemate ought to inform investor behavior over the short-to-medium term.
“One area that’s going to be exciting in securitization is buy-to-rent,” said Ron Mass, a managing principal at Almitas Capital. Once it materializes, he said, the sector will likely have double the credit enhancement of similar products, as the rating agencies tend to be conservative with new products. And yet the new issue spread will likely beat commercial mortgage-backed securities, he added.
Thomas Ho, a director at MetLife, said there was still value in the prime auto ABS space, especially in subordinated tranches. He added that timeshares and container ships are attractive as well, provided an investor is willing to sacrifice liquidity for a pick-up in spread.
The president of Structured Credit International Corp., Mahesh Kotecha, who represents supranational investors keen on maintaining pristine credit quality, said his clients still have an appetite for prime U.S. RMBS.
MetLife’s Ho said the debt ceiling debate was keeping him — along with much of the financial markets — in a holding pattern.
Should the political stalemate get uglier, Mass expected that asset-backed esoterics will move in line with risk assets, which is to say, in a volatile manner.
All the same, the debt ceiling debate and its potential impact on the perceived creditworthiness of the U.S. didn’t seem to be keeping many of them up at night. At least not yet. “You could have a downgrade scenario were the U.S. is still seen as a lender of last resort,” said Ho. “But you pierce the debt ceiling and no one knows what happens there.”
Rates & Underwriting
Easing underwriting standards was also an area of discussion, and how down the road, rising interest rates could expose risks. “The biggest danger is complacency,” said James Baskin, head of U.S. structured research and private ABS at Aegon. He pointed out that all the leading metrics — macro and sector-specific — are improving. But that this has also created opportunities to loosen underwriting standards. While everyone agrees that underwriting practices across asset classes are exceedingly conservative right now by historical standards, problems, Baskin pointed out, might not show up in pool data for another two years.
The question looming over everything is what will happen when interest rates are forced higher as the government scales back the quantitative easing, as it will inevitably. One fear voiced by a few participants is that this will lead to an exodus from fixed-income investments in general.
Even with all the noise, Mass said his insurance clients remained hungry for structured finance products. “On the non-housing side, it’s been hard to keep up with the run off,” he added.
Manish Kapoor, managing principal at West Wheelock Capital, said he was wary of transactions that are too dependent on the timing of tapering. “You really shouldn’t be dependent on the kindness of strangers,” he said.