Scottsdale, Ariz. - Though the majority of the asset-backed world congregated and cavorted under the powerful desert sun here last week, the prognosis for the future of ABS was anything but dry and barren.
Quite to the contrary, in fact: rampant talk of using the Internet to conduct bids and offers online, as well as talk of strong ABS technicals, more tiering in the marketplace, a "hot" and burgeoning collateralized bond obligation market, huge amounts of growth in the asset-backed commercial paper sector and a focus on off-the-run issuers for 2000 were just a few of the themes that whetted the appetite of investors and issuers alike - leaving many of the more than 1,500 attendees at the two conferences with an unquenchable desire to shmooze and talk business.
"The asset-backed world is in a feeding frenzy now," said Joe Lorusso, president of Structured Finance Advisors, a company that will be issuing its very first collateralized bond obligations this year, either at the end of the first quarter of the beginning of the second quarter. "Spreads have tightened and [collateralized debt obligations], in particular, are a mature class. The only problem is that things are getting done too quickly. You see a lot of players rushing into asset classes without doing their homework."
"This is an extraordinarily healthy market," added Jeremy Reifsnyder, managing director at MBIA Insurance Corporation. "There is going to be more market segmentation in asset classes, more use of the CBO/CLO technology, and increased emphasis on credit derivatives and the structured loan market."
Overall, there has been a "much better tone coming into this year than coming into last," said Michael Zarrilli, a managing director at Chase Securities Inc.
Panelists mentioned that in 1999, there was approximately $200 billion in public ABS, $100 billion in European ABS and $60 billion to $70 billion in private ABS. The issuance, by sector, broke down as follows: 35% home-equity, 22% auto, 19% credit cards, and 24% "other," which comprised a larger portion of total ABS than ever before.
"Private ABS is going to grow quite a bit this coming year," said James Hunt, president of Sunamerica Corporate Finance.
As to who bought the paper last year, panelists said that 40% went to money managers and banks, 35% to insurance companies, 15% to pensions, and the balance to miscellaneous mix of institutional investors.
As for the current ABS picture, panelists agreed that there is a lot of "weirdness" going on in the bond markets now, with volatility being thrown into the mix amid the Fed's move towards a higher interest rate environment, and an inverted yield curve shaking market indicators off balance. But, because of this type of environment, the current ABS market seems better suited for issuers, who comprised the majority of attendees at both the Phoenix Fabozzi conference at the Arizona Biltmore and the Strategic Research Institute's Scottsdale symposium, held at the Fairmont Scottsdale Princess resort.
"There is a shortage of credit product now," added Sunamerica's Hunt, "so it is a good time to be an issuer, not an investor."
David Cass, a vice president at Cigna Investment Management, concurred. "Generally, issuers look very strong now."
Arizona Hot for the Internet
Of all the hot topics which had ABS market participants abuzz with speculation, none reared its head more than the impending influence of the Internet on ABS transactions and processes.
"Not only do we use it for research and for bidding in the corporates sector, but I think we are very close to a live system for ABS as well," said Chase's Zarrilli. "The Internet is undoubtedly going to transform a lot of what we do in lots of ways."
"The Internet will bring more transparency to the business," added MBIA's Reifsnyder. "It will certainly speed up the velocity of information, which will have good and bad ramifications. One of the negative results will be an increase in volatility."
As the complexity of many ABS transactions has grown, particularly asset-backed commercial paper conduits, it is becoming more and more apparent that the Web has already been used extensively to cut down on the "dead time" which often beleaguers many deals.
"The Internet is going to be so helpful to the investor," said Deborah Cunningham, senior vice president at Pittsburgh-based Federated Investors, a company that has a $70 billion ABS portfolio. "You'll be able to download transactions and prospectuses."
"Not only will the Internet help the distribution of information, but it will improve the depth and quality of that information," added Kenneth Fischbach, first vice president of MBNA America.
To HEL and Back
During a research panel reviewing the state of each sector at the Scottsdale SRI conference, several analysts had different views regarding the state of home-equity securitization.
"Home equity still looks like it's in a recession," commented Anthony Thompson, the director of ABS research at Goldman, Sachs & Co. "There are still higher-than-expected loss levels and credit quality concerns" which emanated from the market debacle at the end of 1998.
"I don't think 2000 will show marked improvement in this sector," Thompson added.
Other panelists mentioned that in 1999, 60% of HEL issuers were Tier 1 issuers, and a trend towards consolidation brought in stronger seller-servicers.
According to Nichol Bakalar, vice president at Deutsche Bank Alex. Brown, HEL has a few "story" issuers that are worth taking note of: New Century, Long Beach and Ameriquest.
"These issuers might not be as well known, but they have strong credit stories," she said.
"I think home-equity is still alive and well. There is a strong pulse there," said John Plum, a vice president at Prudential Securities Inc. Still, Plum acknowledged that HEL had dominated the downgrade side of ABS last year and the entrance of the government-sponsored enterprises into the sector made matters "a little bit worse."
"The expansion of the GSEs reinforces the credibility of the asset class and the industry, but it affects spreads," Plum added. "It certainly affects marginal players."
Heloc issuance grew last year, said W. Alexander Roever, managing director and head of ABS research at Banc One Capital Markets Inc. "It has a good prepayment story," he added. "If you're willing to take subordinate credit risk, there can be good payback."
As for the manufactured housing sector, panelists see no significant improvement in the near future. "There still is a great deal of headline risk," said Thomas Hourican, managing director at Chase Securities Inc.
Cards, Autos, RV and Motorcycles
Subordinate pieces of credit cards and autos came in by 40 basis points since their wides in August, panelists said, and there has been an increased demand for yield.
Furthermore, consolidation in the credit-card industry and confidence in subordinate pieces will cause sub-prime spreads to come in tightly to prime spreads. The same holds true for the sub-prime auto sector.
Indeed, subordinate classes are very hot right now. The recent Americredit deal found very tight spreads, and a panelist noted that Citibank filed a shelf within the last two weeks for a similar deal.
The new Erisa regulations are expected to be a plus for auto issuers, producing more triple-B product.
"People need to look at off-the-run names in retail sectors, especially with credit cards," said Theresa O'Neill, vice president at Merrill Lynch & Co.
And what sectors should investors be looking at going forward?
"The equipment sector has relatively strong issuers and many repeat issuers, as well as good liquidity," O'Neill added.
Deutsche Bank's Bakalar also added that the recreational vehicle and motorcycle sectors look very attractive now. "They have high quality servicers and good credit quality," she said.