Hartford Investment Management Co. (Himco), has "probably been doing asset-backeds before there were asset-backeds", says Vice-President Jon Prestley, and will continue to keep all ABS options open going forward.
Himco, a subsidiary of the well-known insurance company, The Hartford, has a broad array of asset classes under its belt and invests in almost all of the commodity asset classes, including senior/subordinate structures in both the private and public markets.
"I think we almost explore every asset class, including some of the off-the-run ones like collateralized debt obligations (CDOs), equipment leasing, aircraft leasing and mutual fund fees," Prestley noted.
Last week alone, Himco's activities included buying a CDO tranche, a mutual funds fee transaction, a car rental deal, secondary home-equity loans and a net-interest margin deal (NIM) - all for one portfolio.
Privately Placed Assets
Dennis Kraft, a senior vice president with Himco, feels that the company is pretty diversified in regard to its participation in several sectors as well as in the credit quality of the assets in its portfolio. At the present time, about 30% of Himco's portfolio is private placement ABS or assets that are Rule 144A compliant.
"One of the things that distinguishes us is that we do both public and private stuff in the same area," Kraft explained. "So we have the flexibility to look for value where we see it. In terms of our credit quality, that is probably one of the most interesting things. We probably have two-thirds of the portfolio as single-A or triple-B or lower."
Kraft went on to explain that often times, the large public investors are large triple-A buyers and the private investors are way down in credit quality. He feels that Himco fits in somewhere in the middle.
"I think we're known on the Street as one of the people who always look at good value in the subordinate and mezzanine market," he said.
A Solid Business Plan
The company predicts that it is more likely that it would change its asset allocation before it would add on any new asset classes, being that it has been fairly active in most sectors of the ABS market.
"I don't think that there is any new asset class that we haven't played in at all," said Prestley. "There may be one very small one. We haven't done entertainment royalties or we haven't done timeshares and a couple of others. It would be more of a question of decreasing or increasing allocations."
In the past the company has decreased its asset allocation in certain sectors when risk factors came into play. In the mid-90's, manufactured housing accounted for a moderate chunk of Himco's assets in the mortgage-related ABS arenas as the company veered away from the home-equity sector.
"When the HEL market was very hot in 1997, we didn't really buy anything there because we thought that there was a huge event risk in the market," said Kraft. "As that has shaken out, we've done a pretty large rotation from the manufactured housing market to the HEL market. A combination of those two is probably 20% to 25% of our portfolio and the bulk of that now is home equity."
Kraft explained that although this was probably one of the biggest asset allocation rotations that the company has ever done, the company has decreased its concentration in other assets such as small-ticket leases and franchise receivables.
In regard to franchise loans, Kraft said, "I think that us and the rest of the market seem to have gotten a little bit reluctant to be aggressive in that area."
At the present time, Himco's portfolio is approximately $4.7 billion, a number that Prestley projects will increase by year-end, possibly capping out at the $5 billion mark, although the company does not have a target.
"It's really a function of relative values across sectors," he said. "The way the asset allocation process works depends on where value is versus other sectors such as mortgages or high-yield. On the other hand, it's possible that if our market gets really rich or one of the other markets gets really cheap, we'll be selling our asset-backeds to buy into other sectors."
A Stronger Market Ahead
As for the asset-backed market as a whole, Prestley feels that a noteworthy trend has been the development of the secondary market in several asset classes such as the CDO and home-equity sectors.
"We're seeing much more active secondary trading and increased liquidity in sectors that didn't previously have that," he said.
Kraft added that the market has evolved in terms of liquidity issues. About a year ago, he says, it was almost impossible to buy or sell a subordinated or mezzanine asset-backed security.
"You could not get a bid on a CDO," he said. "It was impossible to find someone who would bid it."
Being a company that has been involved in structured finance since the early 90s, completing approximately 600 transactions, Himco has worked with nearly 200 different issuers, representing a wide range of asset classes.
Prestley feels that the issuer-investor relationship has improved "pretty significantly" within the last year in regard to information and disclosure flows.
"I think it's clear that the market is demanding more and that there is some tiering based on disclosure," he said.