The asset-backed securities market may have hit a speed bump in the form of widening spreads lately, but panelists at a recent industry conference sponsored by Strategic Research Institute in Puerto Rico advise that growth should propel the market going ahead.
Facing wide spreads, market players at the gathering conceded it isn't the best time for companies to issue in the market if they can avoid it. "From an investing standpoint, the biggest hurdle to contend with growth is whether the issuer will want to issue in the face of spreads that are still wide," said Sanjeev Handa, managing director at TIAA-CREF.
"[Companies] may get better execution later in the fall or next year," added Alex Roever, managing director and head of ABS research at Banc One Capital Markets Inc.
At the same time panelists said that the ABS market has a number of cards in its favor - the most potent of which is the significant growth potential of operating risk securities.
"We have a lot of inquiry on the part of companies who want to do these types of transactions and expect significant growth over the next few years," said TIAA-CREF's Handa.
Ultimately, the risk involved in these transactions is based on the issuing company's ability to continue operating rather than on the assets being securitized. To date a wide variety of offerings have arisen using the ABS structure, including some recent offerings for collection firms, timber operations and those backed by aircraft leases.
Although the operating risk sector promises to be an area of growth, the securities aren't for every investor. Even seasoned ABS buyers are cautious given the significant risks involved.
"Some investors might say, I've done franchise lending so I can do these other forms'... you begin to believe you are a legend," said Jeremy Reifsnyder, managing director at MBIA Investor Corp.
Another topic of discussion was the increased need for specialization. In a market that used to be filled with generalists, the continued growth and diversification of the sector will require specialists, panelists said.
"With so many asset classes... I expect to see the ABS market breaking off into different markets like what happened with home equity and mortgages," said Peter Rubinstein, a vice president at Prudential Securities.
However, as long as the market keeps the attention of investors, not to mention companies seeking capital, the sector will continue to develop and create opportunities for a wide variety of transactions.
"What really is energizing is that more and more people are accepting ABS as an investment; you're seeing more and more deals get done. There's always going to be investment opportunities," said MBIA's Reitsnyder. "I expect it to flourish through next year. I don't even think that an economic slowdown will stop it. I think people will certainly try to allocate risks and invest capital when they see opportunity."