Though mutual fund fee securitizations have been an emerging class in the asset-backed market since the mid-1990's, it has only been in the last two years to three years in which more volume has been seen.

Sources say the sector is expected to grow even more in 2000, with the number of underwriters for mutual fund fee deals nearly doubling within the next six months and market leaders such as Constellation (see issuer profile p. 10) putting in place yearly securitization programs.

"Although this asset class is doing well, it is still an emerging class, and you're not going to see a mushrooming of volume like you've seen in the collateralized debt obligation market," said Chom Rectanus, vice president at Lincoln Investment Management in Fort Wayne, Ind. "However, it is expected, even this year, to be a bigger volume than last year."

The mutual fund fee market will grow in other ways as well. The three main underwriters - Citibank, Putnam Lovell and Bear, Stearns & Co., will meet increased competition from new players who are expected to hit the market within the next year, possibly in the next six months.

"We know of two specific underwriters who are seriously contemplating entering this market, but we cannot reveal who they are at this time," Rectanus said. "These players have never been in the market before but see great value in this asset class, and we have spoken to them about it."

Risk And Reward

Moreover, deal size for these transactions is getting bigger as well. These types of transactions are very attractive to prospective investors because they provide additional yield compared to credit card deals and similarly rated transactions. However, investors must employ more analysis for this particular asset class, because the risks are not as well known.

"This market will certainly take off this year," said Gyan Sinha, a mutual fund fee securitization analyst at Bear Stearns. "Clearly this is a capital-intensive business because you're paying up front for a future stream of receivables to the sellers of these receivables and securitization is surely the perfect outlet to reduce some of the capital requirements."

The only obstacle that potential new issuers might have to breaking into this market is a lack of data and technology, Sinha added. A company like Constellation has a data platform known as Legacy Database, which can predict the behavior of variables such as redemptions.

"These are things that you have to have a good sort of understanding of, because that is a significant risk to all these transactions. There are esoteric details that competitors to Constellation do not have," Sinha said. "But I'm sure that as soon as these things hit the radar screens people will start looking at things like that, though I'm not aware of any new issuers right now."

"Constellation is the leader in the market right now, and we'll be having a deal coming four times a year," added Brant Brooks, a Bear Stearns banker working with Constellation.

The No. 1 risk in the mutual fund fee securitization sector is that it is entirely dependent on the current market conditions, because the commission fees that the investor is actually getting payment out of is based on the market net asset value.

Additionally, there is the risk of not being able to get the fees that are being charged.

"They could possibly be reduced or go away all together," said Lincoln's Rectanus, "but that is unlikely because, where would all of these mutual fund companies go?"

Although some market participants are predicting as much as $1.5 billion in volume for the coming year, investors at Lincoln believe that is on the high side, and "that figure might include total outstanding."

There was approximately $800 million issued last year (total issue), and the pricing for these deals is usually in the range of 200 basis points over Treasurys for relatively short durations, which are typically a 2.5-year average life and a four-year maturity.

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