Middle-Market Public Companies Least Likely to Succeed, Observers Say

NEW ORLEANS - The subprime asset-backed market is beginning to see signs of growth, as consolidation across the financial industry has shaken out many of the players. However, that growth will be limited if companies do not have the servicing platforms to handle it.

The Information Management Network's conference on subprime ABS held here last week chose to focus on the themes of servicing and consolidation and how they relate to the home-equity, credit-card and automobile-receivables sectors of the subprime asset-backed world.

The 40 to 45 subprime auto issuers in the market in the early 90s and the approximate 65 issuers in the subprime mortgage sector have contracted considerably, to about nine in auto and 15 in mortgage. Bad economics in the mid-90s led to the consolidation, but those that are left have opportunity to bring capital back to these sectors.

Those who survived "diversified funding sources the most because equity markets are not always there," said Warren Kornfeld, director of ABS at William Blair & Co. "Always a matter of conserving cash, a lot of people are becoming somewhat more interested in the market."

According to Kornfeld, companies that will survive will be large companies with enough capital to get deals done, and companies operating in niche markets.

"[Small companies] can jump in and out quickly, provide servicing versus large companies and can focus on smaller dealers, lenders, and brokers," he said, adding those companies will be those who have more than $20 million in capital, but less than $800 million. "There's no external pressure where they made a promise to someone."

Not surviving the current consolidation wave are the middle-market public companies. "They need a lot of volume to grow, and will have the most difficulty [succeeding]," he added.

However, as companies close their doors, problems with transferring servicing have often become a major problem, as it takes two to three months to transfer the data to the new servicer. Another common servicing problem occurs when servicing operations do not grow in line with the company.

The panelists did agree that for growth to continue, companies need to shy away from proprietary servicing systems.

"Even as companies raise more capital and more cash to do it properly, servicing system must be in place to accommodate growth." said Nick Sourbis, a managing director at MBIA Insurance Corp., adding that servicing has become "a lot more efficient."

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