Declining sentiment and a mess of ABS-specific headlines have not helped the market for esoteric asset classes, already suffering long and hard this year. Even vanilla asset-backeds, which for most of this economic cycle have benefited from the flight to quality, saw meaningful widening this fall.
However, said principals at New York-based boutique underwriter Westwood Capital, miniscule returns linked to historically low indices could render true private, negotiated, highly structured transactions a target for investors pining for yield in 2003.
"January is going to be a telling month. We have to look at spreads in a different light when indices are like this," said Daniel Alpert, a managing director and co-founder at Westwood. Because investors, particularly insurance companies, will be under pressure to demonstrate portfolio profitability, "The buyside will be looking at places where they can make some serious money."
Undeniably, it seems every quarter someone is predicting a resurrection of private ABS, a market that has faded significantly over the last few years. Good or bad, most of the blowups in ABS land - which have led to an incremental shutdown in bid for off-the-run assets - have occurred in the pseudo public, 144A market.
"One of the common problems with deals that have gone bad, is that someone has taken an esoteric asset class and put it into the structure du jour without specifically tailoring the deal to address specific risks," said Len Blum, a managing director at Westwood, and founding member of the securitization group at Prudential Securities. Transactions should be custom tailored for esoteric assets, not the other way around, Blum said, adding, "Sometimes, however, the problem is fraud, which only due diligence, not structure, can sometimes address."
Fans of traditional privates have long blamed the ease of access to the 144A market for the diminished traditional market (and probably blame the "ease of access" for the blowups themselves). But industry pros have pointed to other factors at play this year. For example, accounting issues could increase the cost of access to the asset-backed commercial paper market - another means of financing that has eaten into private volume.
An impressive band of securitization professionals, Westwood Capital was founded in 1995 by a small group of former Oppenheimer & Co. structurers who decided that the high-margin one-off deal was preferable to a bulge-bracket strategy.
The firm is made up of market pioneers. Alpert, for example, who along with Mark Sunshine is a founding member of Westwood, was the lead investment banker on the first-ever commercial mortgage-backed securitization (at Oppenheimer). Later, he played a role in the first single-asset CMBS.
From his days at Pru, Blum is considered a pioneer in home-equity ABS. Sunshine, who has a background in M&A, corporate, high yield debt, ABS and other areas of finance, was lead banker at Prudential-Bache on an Investment Dealers' Digest deal of the year in 1988 - a $445 million securitization backed by life insurance policies.
While the traditional ABS market has nearly sputtered out, boutique firms, such as Westwood, have been crafting unique, hushed transactions - even by private market standards - that are sometimes placed with single investors.
Generally though, Westwood is bringing a small handful of asset-backed deals each year in the $50 million range.
And these are not run-of-the-mill asset-backeds. This group is structuring some funky stuff. For example, Blum and crew pieced together a securitization backed by "deadbeat dads," or more specifically, backed by a portfolio of delinquent child support payments. Interesting, the asset is, legally, a fairly senior sort of individual debt. Provided bad pops are locatable, a firm that has purchased the receivable, or the right to collect, can in certain states legally garnish wages, place liens on professional licenses, or liens on retirement accounts, such as the deadbeat's 401k. In May of this year, Westwood arranged a $30 million whole-company securitization for an undisclosed company specializing in these receivables.
"What we're doing is somewhere between tradition debt and securitization," Blum said. "The types of issuers we target are not looking at league tables. Our business plan is totally different than the big guys. Ours is to structure a select few of deals that cannot necessarily be replicated."
Westwood has completed a number of self-storage unit securitizations, and has securitized lawn and garden equipment, aircraft loans, operating leases and several other asset types. The firm actively finances small-business lenders, such as Small Business Loan Source, through securitization.
Hotels, lodging and gaming
While Westwood securitizations are often one-off and small in size, the firm is no stranger to sizable transactions. One of the firm's specialties is financing the gaming, hotel and lodging industry. Winning the gaming deal of the year from IDD back in 1998, Westwood completed $800 million of financing for Aladdin Hotel and Casino that included mortgage debt, senior discount notes with warrants, common stock and an equipment lease facility. The blended cost, it turned out, was 200 basis points below a straight high yield debt financing via Goldman Sachs for a casino just a few lots down on the strip.
Westwood has completed several financings for Mountain Spa Resort Development and affiliates in Las Vegas, and the company is currently structuring a number of deals in Tokyo for a group of casinos. Also in Asia, Westwood is working on several other transactions, including a medical receivables deal for a Japanese company.
Currently, Westwood is closing on a $460 million securitization of two related public commercial mortgage funds.