The boom in ABS may be causing some European investors into rushed decisions, Standard & Poor's analysts said last week. In the haste to include ABS in their portfolios, many portfolio managers have abandoned a through credit analysis and are increasingly dependent on ratings, in some cases, as the sole investment decision-making factor.
Market fundamentals have taken a back seat in influencing ABS spreads and investors in senior paper often see a triple-A rating as a passport to invest, forgoing any fundamental analysis, S&P analysts said in a report published last week. "The high demand for ABS has led to a dramatic shortening of the time investors have to make their investment decision. This has been instigated by the influx of the new breed of investors, whose buy-and-trade attitude makes them more aggressive in their decision making," said Managing Director Ian Bell, of the European structured finance group in the report. "Traditional investors, who typically have a buy-and-hold brief, are being forced to follow suit, with the result that the time-consuming and costly fundamental analysis is, in many cases, not being done."
And while ratings do not address certain risks - such as prepayments, liquidity, or interim rating volatility - default studies show that they are very reliable indicators of the default risk over the legal term of a transaction, which makes predicting future ratings changes an essential part of surveillance, added the report. Surveillance is therefore becoming increasingly critical for European ABS.
"Trading in the secondary market is nearly at levels seen in the primary market, so effective surveillance by market participants is crucial in making investment decisions," said Managing Director and head of surveillance Simon Collingridge. "But there are challenges in monitoring transactions, which are restricting some investors from entering the secondary ABS market. However, investments we are making are increasing transparency and reducing these barriers."
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