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ABS East: Investors “Picking over the Rocks and Seashells”

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Some big investors at IMN’s ABS East conference are keeping their powder dry; in the event that an exogenous event roils the financial markets, they want to be able to take advantage of any bargains in asset-backeds.

In the meantime, it’s a challenge to put money to work in assets that produce decent returns without taking on excessive risk.

Despite a narrowing lead for Democratic candidate Hillary Clinton in the November presidential election, 69% of audience members polled at an investor panel Tuesday morning cited the health of the U.S. economy as the biggest risk to the structured finance market. New regulations came in second, with 18% of the vote; just 13% cited the outcome of the presidential election as the top concern.

Aegon USA Investment Management, for one is concerned about the election. With the outcome “a coin flip,” the insurer is positioned fairly conservatively, according to James Baskin, head of U.S. Structured Finance.  “We have room to add in an adverse outcome,” he said, without specifying what that outcome would be. “We’ve made room via paydowns, inflows,” he said. “It’s difficult, given our fundamental view of structured products - they’re still cheap - to proactively sell.

TIAA-CREF also struggles to put new money to work profitably in high-quality asset-backeds. “Despite the spread compression we have seen over the last month or two, we continue to see inflows in the funds we manage,” said ABS portfolio manager Aashh Parekh. He said the firm does look at riskier asset-backeds, “but with exogenous events looming, it becomes a challenge” to move further down in credit.

So what assets do the panelists like?

TIAA-CREF and Loomis Sayles are enthusiastic about cell phone securitization, though they wish Verizon’s inaugural deal paid a higher risk premium.  

“It seems like good collateral, and there are some pretty good mitigants to the risk of credit performance,” Parekh said.

Alessandro Pagani, Loomis Sayles’ head of securitized assets, takes some comfort from data showing that consumers see paying their cell phone as a high priority, even if the debt is unsecured. “Ask your kids, would you eat” [or use your cell phone]?

“On the other hand, you do have carrier risk,” he added.

Pagani also plans to take another look at bonds backed by federally guaranteed student loans now that rating agencies are concluding their reviews of a broad swathe of these securities.  “We could see that as an opportunity,” he said.

Parekh is in no hurry to get back into FFELP bonds, however. “There is still some noise that needs to be cleared up,” he said.

Scott Seewald, a managing director at New York Life Investment Management, said aircraft finance has become a more important asset class for the firm “because we like the big ticket size, and there’s still some spread.”  In addition to buying xxx, the insurer also does some bilateral deals with carriers.

Aside from that the insurer is not fixated on any particular asset class, though it’s looking broadly at esoteric ABS. “It’s lot of picking over the rocks, picking over the seashells,” Sewell said.

The panel audience was also polled (electronically) about issuance next year. Just over half (54%) expect volume to decline again in 2017.

That’s in line with MUFG’s forecast of $185 billion in issuance for next year, according to Tricia Hazelwood, the firm’s head of structured products and also the panel’s moderator.

So far this year, there has been $149 billion of issuance, down from $169 billion at this point in 2015. And total issuance of $202 billion in 2015 was down from $218 billion in 2014.

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