Jrg Dresen, head of fixed income for AXA Colonia Asset Management in Germany, is a relatively new convert to the world of securitization, having only started to buy asset-backed deals towards the end of 1998. But in that time he has certainly been won over to the charms - and the yield pick-up - of mortgage- and asset-backed deals.
AXA Colonia is the German arm of AXA Investment Management, the fund management operation of France's AXA insurance outfit. In Germany alone the company has E35 billion under management (of which around E22 billion is made up of debt deals) and ABS is a significant and growing part of that portfolio.
"For our clients in Germany asset- and mortgage-backed deals are a wonderful thing because they are able to get additional value compared to other investments," Dresen says, adding that in a low interest rate environment the pick-up that ABS provides goes along way to help German insurance companies meet returns of 7% to 7.5% that their customers expect.
"When you think that if you buy a single-A tranche which gives you a pick-up of 60 to 70 basis points - or maybe more depending on market conditions - when for pfandbriefe it is around 30 basis points over. And the nice thing is that there are a lot of tranches below you and the cash collateral to make the deal safe - at least 30% to 40% of the deal must default before it costs you."
Going Down the Credit Spectrum
Not that he only invests in the more senior end of deals, as Dresen is an example of that relatively rare beast - a European investor willing to buy lower rated tranches and equity pieces, particularly in CLO and CBO deals. "You get such a big pick-up and even then there is a cash pool under you. You can go down the credit spectrum and still be relatively safe."
However, the fact that his clients are looking to asset-backeds for pick-up across a whole portfolio limits the kind of deals that he can buy on their behalf. If, he explains, a client has a portfolio of E10 billion then it has to be possible to buy up to E1 billion of an asset class without buying every deal of that kind that comes out in order to provide a worthwhile pickup for the whole portfolio.
This means that he is most keen on the high volume asset classes, such as residential and commercial mortgage-backeds, CLOs and CBOs. Credit card deals are also out, simply because they are too short to appeal to most of his clients who are interested in longer-term investments.
And this is another advantage of the asset-backed market: it offers an alternative to government debt and pfandbriefe for clients who need to match long-term liabilities with long-term assets. He adds that another key advantage is that asset backeds allow for increased diversity - corporate high yield CBOs allow exposure to a diversity of businesses, for instance - and are in themselves a way to diversify away from corporate bonds, government bonds and pfandbriefe.
The advent of the European single currency has also allowed for increased diversity, as Dresen has for the first time been able to buy asset backeds from other European countries. As yet, he has only bought mortgage deals from France and the Netherlands, as the mortgage markets in both of those countries are similar in quality and character to those in Germany.
Expanding into Europe
However, he does not rule out branching out elsewhere in Europe in the future. "We looked very closely at what
is going-on in Spain because they have different collateral for residential mortgages - how their LTVs are, how
the mortgages are insured, etc. You have to be careful."
Like many continental European investors he also buys U.S. dollar deals, turning to the Americans for the lower tranches and equity pieces of corporate high-yield CBOs. Not only does the U.S. market provide well-diversified and liquid CBOs, it also boasts the most experienced asset managers. "Because of the track record it is logical that you will find the best asset managers for that asset class in the United States," he says. "It is picking up in Europe, and we will see if it will be possible to do a diversified European high-yield CBO this year."
The European market is beginning to resemble the U.S. in another way, he added, pointing to the increase in programmatic issuance, something that has been scarce in the recent past. He welcomes programs such as Paribas' Domos mortgage-backed series and Deutsche Bank's Core CLO program and Haus MBS deals, as they add to both transparency and liquidity.
The Spectre of Regulation
On the other hand, he said, echoing a perennial complaint of European investors, Europe still lags behind the U.S. when it comes to on-going deal reporting. "I think that European arrangers and issuers have to learn a lot from what is going on in the U.S. If issuers are not willing or able to make reports about the performance of collateral they should not be in the market."
Calling for issuers, arrangers and rating agencies to make greater efforts to disclose such information, he raises one prospect that may give them an added incentive to listen. "Here in Germany, financial markets are very regulated, so if people realize that it is difficult to get the right information it will end up being regulated. And that can't be what the arrangers or issuers want."
In his new position as vice-chair of the European Securitization Forum, the European arm of the U.S. Bond Markets Association, Dresen will be pushing the market forward on this issue and representing European investors' interests in general. "I was very pleased to take on that role because I think it is important that both sides of the market are represented. What concerns banks - even those who also invest - can be different from those who are "end" investors and our views need to be reflected."
