The second day of Information Management Network’s Global ABS 2010 conference started with a panel that looked back at the financial crisis.
The discussion centered on what lessons can be learned from the meltdown and the steps to take to bring investors back into the market.
Panelists said that with the investors such as conduits and SIVs gone from the market, and which are likely to never return again, a new investor base for European ABS has to come in.
Hikmet Sevdican, a partner at Dynamic Credit Partners Europe, said that there are underlying issues that need to be addressed before new buyers can come into the market. These are giving buyers the ability to verify loan underwriting and giving assurance to buyers that deals will be supported by the banks.
“Creating homogeneity among cashflows is important to bring investors back,” Sevdican said.
Investors, he said, should have information about the initial stage of the loan. "Averages don’t say anything,” he said, explaining that merely getting the average LTV, for instance, might just result in a barbell effect.
Additionally, he said that banks should demonstrate their commitment to ABS in general, adding that these financial institutions could easily just resort to covered bonds instead of ABS.
Investors he said, simply have to understand what the risks are. They “don’t need to go through all of the loans,” Sevdican said, but at least that option should be available to them.
Pradeep Pattem, managing director at the Royal Bank of Scotland, said that securitization has three purposes: risk transfer, funding or an arbitrage tool. He said that the funding element is only a small component and could be replaced by using the unsecured and covered bond markets.
Marc Nocart, co-global head of securitization at SG CIB, said that people forget that securitization is a very good asset liability tool. Through ABS, banks could manage its exposure and distribute credit.
Panelists also said that the difference between securitization and the covered bond and senior unsecured markets is the diversity factor.
Furthermore, covered bonds are more traditional and can be benchmarked against a comparable index, which is different from ABS.
Some speakers suggested for the ABS market to revisit using a benchmark index because this could create liquidity that is attractive to some investors.
Other panelists said that investors such as pension funds and insurance companies have to be brought in even though it might take time. It would involve justifying buying ABS when these firms could easily tap the unsecured markets.
