A new breed of investor has aggressively taken the reins of sub investment grade European securitizations, and banks are prepared to meet the new demand by adding personnel. At the Morgan Stanley investors' roadshow in London last week, panelists said that this growing interest in sub investment grade credits has prompted them to seek more staff with expertise in these asset classes.
"The upcoming trends this year will focus on the influx of new investors and the changing of the landscape," said Steve White, executive director of the securitized products group at Morgan Stanley.
These new investors, White said, will likely shift the focus of 2003 toward the buyside end of the supply/demand scale. "We have to look at the impact that money managers and insurance companies are having on this business," he continued. "In the beginning, most of our business was with banks; now, with new investors, we are seeing much more involvement in and impact from fixed-rate bonds like the IMSER deal, which included over $100 million of triple-B bonds."
The peak of interest in lower-rated bonds has corresponded with the demise in corporate credits, White explained. These new investors are much more apt to question the relative value of a triple-A corporate credit considering the economic turbulence that's attached to some big names. He added that demand for lower-rated paper is likely to remain strong as the influx of new buyers continues.
Among the new buyside faces looking at the lower end of the credit spectrum is a wave of U.S. investors. "These are people looking for equity-like return, and they are turning to lower-rated assets to get this result," he said. "At our trading desk we have added new people who specialize in these lower-rated credits."
According to analysts at Barclays Capital, this wave of U.S. players is driven by concerns regarding the American economy. This, coupled with notable headlines like the collapse of NextBank in early 2001 and news of fraud at National Century late last year, has prompted the growing American interest in European assets.
Barclays expects the trend to continue into 2003, as U.S. investors are pressed to investigate methods of diversifying portfolio exposure. "The value of diversification became very clear in 2002, and we expect that this will be a continuing theme in 2003," the bank reported. "Increasingly, investors are looking to spread risk across collateral types, geographic regions and economies."
"CDO investors, many of whom may have thought that they had diversified their exposures, learned a painful lesson during 2001 and throughout 2002," Barclays said. "The heavy exposure to U.S. corporate debt - even though the portfolios were diversified with respect to sectors of the corporate bond market - led to downgrades and poor performance."
European acceptance of this new wave of buyers is evidenced by the growing number of U.S. dollar tranches included in some transactions that came to market in 2002. Already this year, one of the biggest issues set to price in the coming days - Northern Rock's Granite Mortgages 2003-1- will include approximately $2.1 billion in U.S.-denominated tranches of European asset classes.
What's hot, what's not
Morgan Stanley is taking a negative view on the triple-B class of RMBS transactions this year, although panelists at the London roadshow noted that the team is currently marketing a second issue for IntesaBci, which includes approximately $2.14 billion U.S. equivalent of a triple-B rated tranche. Nonetheless, these tranches typically heralded pricing at +150 basis points - not a real value when other triple B tranches are pricing north of 200 basis points, they said. The bank is also taking a negative view on Italian paper because so many deals have flooded the market over the years.
On a positive note, the group viewed non-performing loans as still worthy of positive value, dubbing the asset class one of the cheapest in the market today. Also included were operating company securitizations. Because of the unique nature of such transactions, buyers have the opportunity to diversify their portfolios; however, the panelists warned that buyers must first examine what credit linkage might be present in these transactions.
Going forward, Morgan Stanley expects to see a $630 million U.S. equivalent operating company transaction for a U.K.-based cinema chain, a Dutch RMBS transaction and an addition to the ELOC series that would include pan-European assets. The deals should begin marketing by March.