* EW YORK - With a laid-back, interactive environment, more akin to a late-night talk show than an industry conference, roughly 325 participants gathered in New York last week for the American Securitization Forum's First Annual Meeting to discuss the issues facing the market. With a stage featuring boardroom chairs and coffee tables, as well as a wireless system allowing audience members to vote on various questions posed by discussion moderators, the gathering made for a perfect mid-year review to the market.
Following opening remarks from U.S. Treasury undersecretary for domestic finance Peter Fisher, the discussions turned to more market-specific topics, including the impact of the broader economy's effect on the ABS and MBS markets, how to handle fraud and blowups and the regulatory challenges posing threats to securitization.
"The conference achieved its objectives, which were to deliver high-quality educational content," said ASF Executive Director Dwight Jenkins. "The discussions were substantive and very detailed. All panelists scheduled to speak did so, and we had attendees come in from Alabama, Pittsburgh and even London," he added.
During the morning's research strategists discussion, Lehman Brothers Senior Vice President David Heike noted that, while the U.S. asset-backed market is facing its first real test, "it is passing with flying colors." Heike cited the sustained liquidity that has flowed into the primary market over the first half of the year and the relatively stable spreads.
JPMorgan SEcurities research head Christopher Flanagan concurred, adding that the worst is behind the market and that "even distressed assets have performed as the lawyers would have expected, although investors may not agree." And the ratings volatility seen throughout last year and into 2003 can even be a positive factor, highlighting correctable flaws in structures and servicing. "We could, theoretically structure to avoid downgrades, but without any rating volatility, we'd all complain that we can't get better than Libor-plus-two," said Flanagan.
The fallout from stresses that have hit the market in recent months has educated the industry and the ABS market has reached its maturity, with a realization of the corporate-ABS linkage. Lehman's Heike speculated that the correlation of ABS and corporate spreads is currently at 80% to 90% and "some corporate debt and credit default swaps trade inside of ABS."
Deutsche Bank Securities researcher Anthony Thompson predicts increased tiering in the credit card sector as the emergence of purchase-rate restrictions - unheard of 18 to 24 months ago - are now a risk that plagues the sub-prime credit card sector. He added, "it is highly unlikely that large (credit card) issuers experience a zero purchase rate scenario."
In the home equity sector, Citigroup Capital Markets researcher Ivan Gjaja said the biggest risk facing issuers is in the predatory lending arena. This is currently being mitigated, he added, by the proactive stance rating agencies have taken of late, often announcing opinions prior to legislative effective dates.
The never-ending wave of mortgage-related supply has led to changes in the view of tiering amongst home equity issuers. JPMorgan, for example, had previously felt it best to stick with top-tier names within the sector, but performance has been consistent among the various issuers, particularly dealer conduit shelf issuance, which was recommended by Flanagan. Yield pickup for dealer shelf supply can be 10 to 15 basis points for triple-A paper, and as much as 100 basis points for triple-B subordinates, something Flanagan recommends investors reach for.
Citigroup's Gjaja added that he thinks tiering within home equities is overdone, adding "spreads for home equity paper are not a linear function of the credit risk" in the current environment.
While the "Mother of All Bankruptcies," Conseco Finance, is over, the manufactured-housing sector is not out of the woods yet. In fact, the future for MH as an asset class is bleak, according to Flanagan, who cited a paradigm shift in the housing market, with expansion of sub-prime mortgages moving previous MH buyers into more traditional home ownership. Flanagan expects the negative performance in MH to continue for at least the next 12 months.
The most significant development of the first half of the year is that "pooling and servicing agreements can be changed by bankruptcy court and regulators," said Citigroup's Gjaja. "It is now important to take into account the true cost of servicing," he said.
The CDO market has evolved this year, from a primary focus to more of a balanced secondary market, said Deutsche Bank's Thompson, with the best opportunities seen in downgraded senior classes, or "busted" triple-As; these trade at multiples to the new issue market and are cheapened by a "lack of double-A buyers in structured finance."
Most of the sessions throughout the first day were dedicated to the fallout of the scandals of the financial world that have had rippled into structured finance. Numerous mentions that the bankruptcy remoteness concept is flawed now have the market on the lookout for pending blowups.
MBIA's Derrin Culp outlined the warning signs that trustees, rating agencies and investors look for. Servicer reports offer the best place to look and can signal trouble even when things look good, or "too good to be true," Culp said. Hidden within servicer reports are details such as affiliate units making up for receivables shortfalls or previously delinquent accounts being considered in good standing once paid in full, despite the past troubles.
"We all like to see good news," he said, "but sudden, abrupt good news is worrisome."
As for sector blowups, Standard & Poor's Chief Quality Officer Tom Gillis advised that when numerous start-up entrants spring up in a certain sector, its time to look out. "Lenders shouldn't compete for borrowers," noting the history of the franchise ABS market. "Instead lenders should filter out the bad credits."
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