BOCA RATON, FLA. - The ABS research roundtable discussion at Information Management Network's ABS East conference last week centered primarily on the valuation of triple-B credit card ABS versus comparably rated corporate unsecured debt. The precise valuations, researchers opined, depend upon an investor's view of corporate risk. Other dynamics do come into play. However, what drives valuation is the vantage point - what someone thinks of the placement of a securitized revenue stream in an issuer's capital structure compared with senior unsecured debt holders.
The corporate market, being more transparent and liquid, is more volatile than ABS, although some argued whether this should be the case. The cases in point of choice for the panel of eight sell-side researchers were monoline credit card issuers Capital One Financial and MBNA America Bank - both of which sport triple-B unsecured debt ratings.
While spreads for subordinated ABS and debt trade roughly in line with each other for both issuers, there are variations depending on recent headlines and market sentiment. Unsecured spread movement is more pronounced than ABS spreads, which became a point of contention during the discussion.
Credit Suisse First Boston researcher Neil McPherson noted that corporate spreads, and the credit default swaps that lead them, are often a good indicator for ABS investors to predict the future direction of ABS spreads. Deutsche Bank Securities' Karen Weaver said that ABS should be considered "special-case senior secured debt," meaning that it be should place higher in the capital structure than unsecured debt, and thus trade through corporates.
"[ABS] valuations should be based on senior debt trading levels in relation to subordinated debt levels," said Weaver. She added these two should price accordingly rather than independently of each other.
Theresa O'Neill of Merrill Lynch added that broader market sentiment often obscures pricing, as the rebounding unsecured debt market has outperformed ABS in recent months in a broad market rally. She added that spread differentials between unsecured corporate debt and ABS should narrow as an issuer further diversifies its funding sources. An issuer's unsecured spreads suffer, she argued, as it becomes increasingly reliant on ABS for liquidity.
But there are supply factors to incorporate, noted both CSFB's McPherson and Banc One Capital Markets' Alex Roever. The triple-B sector is such a small sector of the entire ABS market. This, combined with the fact that the development of de-linked issuance vehicles will likely lead to triple-B ABS tightening going forward.
Throughout the year, there has been a surplus of triple-B ABS supply, Roever noted, likely leading to issuers being "inclined to bring higher-rated bonds going forward," Roever added. CSFB's McPherson cited statistics illustrating the capacity for the de-linked vehicles to issue senior bonds throughout next year.
These dynamics will likely lead credit card ABS spreads in general to tighten.
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