Paradise Island, Bahamas - The setting here last week was strikingly apropos: overcast, cloudy skies -the vestige of passing hurricanes - doused this tropical island with fits and starts of rain as more than 1,700 delegates from across the United States coalesced to grapple with how the asset-backed community has weathered its own storms and tempests over the last year.
And the consensus is that neither the ABS market nor the Fabozzi/IMN-sponsored sixth annual convention was a washout; but the major themes of the event - continuing industry consolidation, the impact of rampant personnel changes and a "war on talent," the need for further innovation, increasing globalization and the ramifications of looming regulatory changes - pointed toward the reality that while ABS has been performing well recently, it is not quite paradise.
"I am calling this conference Securitization Survivor' 2000," said Brian Clarkson, group managing director of asset-backeds at Moody's Investors Service, as he addressed the attendees at the conference's opening remarks session. Indeed, the analogy to the popular summer CBS series "Survivor" seemed quite suitable and humorous, and emerged as a theme for the entire conference.
As Clarkson displayed the names of companies within each sector that had been "eliminated" last year - especially the headline-catching losses within the home-equity loan and subprime auto markets - and then discussed the "alliances," or mergers that have led to more industry consolidation, the Survivor theme and tropical-island setting resonated strongly with the delegates, who represented more than 90 organizations worldwide.
"There has been a Survivor' series in every industry, each with its own little vignette, and the question is, What will Securitization Island look like in the future?'" Clarkson asked to a panel of ABS experts.
Throughout the discussion of potential ABS issuance for this year and next, several important forward-looking trends emerged from the panelists which gave the attendees food for thought: Among them were a move toward the derivatives market instead of the cash markets, an uptick in the issuance of stranded cost deals for next year, continuing developments in the European and Japanese markets and a prediction that the market will look towards the telecommunications and vendor finance industries as it searches for innovation and creativity.
Consolidation and Issuance: 1 + 1 Doesn't Equal 2
While some of the opinions differed, the overwhelming consensus was that while global ABS is on the decline compared to 1999, it is still quite healthy and headed toward a robust 2000 and 2001.
"Even corporates have been down by 5%, so we're actually doing well," noted George Graham, managing director and co-head of asset-backed finance at Salomon Smith Barney. "Higher interest rates and less competition have affected the manufactured housing and home-equity loan sector, but auto is up $10 billion from last year and Sallie Mae has added fuel to the market for student loans. Additionally, the ABCP and CDO markets are pretty healthy."
While last year's fourth quarter showed approximately $53 billion in issuance, at least the same amount or more is expected for fourth quarter 2000, and according to panelist Philip Weingord, managing director and co-head of ABS at Deutsche Bank Securities, Inc., issuance of $64 billion or $65 billion would allow the market to break even with last year or even exceed it.
"Last year there was approximately $220 billion ABS domestically," Weingord noted. "Of course, consolidation leads to a downtick in issuance, especially for home-equity. But there might be a slight pick-up in cards this fourth quarter, and although there was only $18.5 billion for home-equity for the first three quarters, the fourth quarter might bring us equal to last year, in total."
However, other market observers noted that the global marketplace, which is becoming ever more important for ABS, inflates the issuance numbers dramatically: "You should see between $400 billion and $425 billion in global ABS for 2001," said panelist Robert Little, managing director of ABS at Merrill Lynch. "We want to see global issuers with global access."
Moreover, other attendees listening to the panelists later on noted that the $220 billion estimate doesn't include all CBOs or other forms of re-packaged securities.
While panelist Vernon Wright, vice chairman and chief corporate finance officer at MBNA, maintained that liquidity improved over the last five years, and Daniel Stachel, principal at State Street Global Advisors, said that there has been no hiccup for two years, both men agreed that outside forces are hard to predict, and the consolidation of the investment banking community could change the nature of the business.
"Will investment bankers go from being market makers back to being brokers for deals?" queried Wright.
Still, Deutsche Bank's Weingord expressed optimism about the trend: "Now there are bigger players and better capitalized players, and that is a good thing," he said.
Jim Irvine, managing director at Bank One, concurred.
"Consolidation is good for the market. If you want full liquidity, then trade Treasury bills."
The International Horizon
With investors wanting to diversify more and more and the recent spate of deals involving foreign issuers tapping the U.S. market, another major theme emerged at the conference: the continuing growth of international ABS.
Though the foreign markets are much slower to develop - mainly because there are no regular issuers in Europe and the fact that the European market is not driven by financial assets as much as the U.S. market - the Japanese and European markets are certainly progressing, and panelists predicted them to grow next year.
Not everyone agreed. however: "Not a lot of people made that leap to Europe, in reality" said one attendee, commenting on what he heard at the session.
Still, securitization in Europe is only going to expand, sources said.
"I think the next wave of European securitizations will come from Eastern Europe," said Robert Drutman, a portfolio manager at EBRD.
"The U.K. still comprises 50% of the issuance out of Europe," added Bank One's Irvine. "But we've taken the initiative in many ways," with unique structures and novel deals.
The Japanese market, on the other hand, will look more like the U.S. market in a few years, while observers noted that financial assets need to develop in Europe before investors can truly become interested.
Moreover, the trend of consolidation plays into the uptick in international issuance: "Now we are seeing seven or eight global investment banks looking at the markets holistically," noted Merrill Lynch's Little. "Still, Europe doesn't have the same type of information available to people as in the U.S. market, so that makes it difficult."
The Future: Derivatives,
Telecom, REIT paper
As for what the securitization markets will look like next year and beyond, panelists said there will be a growing demand for credit risk, producing growth in the derivatives markets.
"Derivative structures will be huge," said one ABS participant in the audience.
Although a move towards derivatives and an increase in stranded-cost deals was predicted by several panelists, "There aren't going to be new asset classes that are going to dramatically impact the U.S. league tables," said SSB's Graham.
"It will be difficult for ABS to break out of the $260 billion to $280 billion range," added Weingord. "Now, most U.S. issuers are big financial institutions."
That being said, other panelists noted that a huge potential for the market exists in telecommunications receivables and "hard assets," such as utility bills.
And even more important - though not really addressed by the panels - is the predicted increase in REIT paper, mortgage ABS and CMBS.
"There was a lot of talking around issues at the introductory session, and in their issuance estimates they don't always include all of the different type of paper out there," asserted a delegate.