PHOENIX, Ariz - As many as 2,700 delegates showed up last week for Information Management Network's ABS West, the second round of winter ABS conference season, which has been a market tradition for roughly a decade. With the prior week's 1,000-plus attendees at the American Securitization Forum's Scottsdale gathering, this was quite possibly the greatest two-week blitz on Arizona the ABS market has ever delivered.
IMN said attendance exceeded last summer's Barcelona show, which is typically the conference organizer's largest securitization gathering.
Perhaps the opening ceremonies lacked the heated exchanges that generally kick off IMN ABS shows, but who would have guessed that an analogy of asset-backeds to crack by one investor would be so well received by the crowd? This clearly is an industry with a sophisticated sense of humor. "Pretty soon you're freebasing Oakwood triple-B manufactured housing and aircraft," the investor said.
In all seriousness, the analogy was akin to investors getting hooked on the spread pickup in previously unexplored asset classes and notches of the capital structure. Now, with too much money chasing yield, spreads are coming in, pushing investors into even riskier asset classes and further down the credit spectrum. And for what? Spreads continue contracting to historic lows.
During the second of the two opening panels, William Sidford of Mony Capital Management noted that multi-sector CDOs, which have yet to fully ramp up, might have trouble closing, if they close at all.
"I just don't think the arbitrage is there," Sidford said.
An interesting situation would arise if several half-ramped CDOs unwound their positions at once.
ABS growth plateau reached?
Despite spread predictions, which varied widely from panelist to panelist, the opening discussions turned to the inevitable annual question: Can the market sustain the kind of growth it has seen in the past several years?
In previous years, panelists had suggested the rate of growth in the asset-backed market would have slowed by now. However, aside from the ABCP market, which leveled off last year (often attributed to accounting uncertainty), growth has continued surpassing expectations. In fact, even as home equity ABS issuance is expected to decline this year, Moody's still predicts 2004 will be the second heaviest year of home equity ABS.
"So many thought this market couldn't grow by this point," said Bob Malin, co-head, asset-backed finance at Citigroup Global Markets. "But notice, the size of the ABS market in a relative sense has increased."
Malin estimated that the size of the ABS market has reached 85% of the corporate market, compared to 60% five or so years ago.
Whereas 10 years ago, four out of the top 10 large-scale commercial banks were accessing securitization, Malin says he currently counts seven out of the 10 largest. "It's actually created a need to securitize as a whole; you need to find places to grow," he told the audience.
The rate of growth in U.S. securitization has slowed a bit over the year, but 2003 was boosted tremendously by mortgage-related issuance, said session facilitator Michael Kanef, of Moody's Investors Service. "Historically, home equity comprised about one-third of the market but in the most recent year it saw an explosion."
In fact, Moody's estimates that even though it forecasts a decline in home equity issuance this year, it still expects 2004 to be the sector's second biggest year.
As a whole, the 11 participants in the opening session expressed optimism for the market going forward, both in terms of dealing with current issues and with sustaining strong issuance numbers.
Also the crystal ball:
Bank One's First Vice President Stephen Etherington noted that despite the usual stability in the credit card market, which typically hums along, there has been some noteworthy activity likely to affect 2004. "The smaller guys, in the end, didn't have the better mousetrap," Etherington added. The distribution and execution wars' that have ensued between large- and small-scale firms have limited the growth of some credit card ABS issuers. Etherington also elaborated on an innovation he would like to see continue in the credit card market - de-linked issuance platforms, but the ability to spontaneously issue small sub classes, in the hypothetic range of $50 million, from master trusts.
Also offering his view on the near-term outlook, United Capital Markets' John Devaney was, perhaps, the most candid. "I like to run completely against the herd," Devaney admitted, naming franchise bonds, manufactured housing and others as places where he's found opportunity. "I like aircraft. I want to buy it all. I really love everything - it just depends on what the price is."
* Mark Adelson, director and head of structured finance research at Nomura Securities, is also optimistic about 2004, but feels that the off-the-run revolving assets could present more surprises.
* Michelle Russell-Dowe, director and portfolio manager at Hyperion Capital Management, would "take a little bit of profits right now," she said.
* Washington Mutual's First Vice President Jeffery Sorensen believes NIMs will continue performing well.
* Ted Breck, managing director, Merrill Lynch continues to like the auto market. "I'm optimistic again...spreads are at all-time tights," he said.
* Nelson Soares, managing director, Lehman Brothers, sees a robust atmosphere in the ACBP market, accounting issues aside. Soares added, "One piece of good news we see going into 2004 is that credit seems to be moving in a better direction."
* Majorie Anderson, senior portfolio manager, Allstate Investments, would like to see more of a focus on the transfer of servicing agreements embedded in deals.
* JPMorgan Trust Bank's Senior Vice President Joseph Giordano would like to be paid more, should the market move toward an expanded role of the trustee in transactions. "We should get reasonably paid for it...[and] end duties should be spelled out in documents," Giordano said.