Though the investor base for mutual fund fee-backed securities is broadening, the sector's growth could not have happened without its core investors willing to learn about the asset class a few years back.

Still willing to explore new products, SunAmerica Corporate Finance, which has been purchasing 12b-1-backed securities since 1997, is looking into a lottery-backed deal that should come to market within the next 60 days, said Sam Tillinghast, an executive vice president with the company.

"We're interested in the non-traditional asset classes, although current equipment leases dominate our portfolio because those deals tend to be larger in size," said Tillinghast.

SunAmerica is currently in talks with the lottery receivables issuer. Next on the list is entertainment receivables.

Private ABS

The company was founded in 1990 as a division of SunAmerica Inc., a financial services company specializing in retirement savings solutions, solely to handle privately placed asset-backeds.

More recently, SunAmerica Inc. merged with American International Group (AIG), a world leader in international insurance, becoming a wholly-owned subsidiary. AIG is considered to be the leading U.S-based international insurance organization and among the largest underwriters of commercial and industrial coverage in the U.S. With the merger, SunAmerica's financial strength has been strengthened and its access to capital has been enhanced.

"We handle the privately placed equipment lease, prime auto and trade receivables deals, although we like to diversify it with non-traditional investments," said Tom Denkler, a managing director in the private asset-backeds group at SunAmerica. "And we do have a few 144A's in our portfolio."

SunAmerica's private ABS portfolio is currently worth $1 billion, but the company plans to see an increase in the size throughout the year. Presently, the company does two to three transactions a month. It is more than likely that SunAmerica will increase the sizes of the deals that are completed, rather than increase the amount of transactions that are completed, Tillinghast said.

On the public side of things, SunAmerica originates its own assets, some of which include secured loans, debt securities and asset-backed securities. The company also invests in various partnerships that extend to fixed-income securities, mortgage loans and income-producing real estate.

Paving Its Way

SunAmerica jumped on the mutual fund fees bandwagon only a year after the sector began in 1996. Tillinghast said that the company has endured nothing but "smooth-sailing" since its initial entry into the risk-free sector.

"We haven't encountered any problems or any downgrades on any of our deals," said Tillinghast. "In fact, several of our transactions have received upgrades and our volume has remained the same."

The only noteworthy problem that Tillinghast has noticed with the mutual fund fee sector is the amount of volatility that is often seen.

Tillinghast and Denkler explained that mutual fund fees are compensated by their management fees. As a result, if there is a good performance of assets, then there are higher fees.

"The way they diversify it is they sell off a stream of 12b-1 fees and contingent deferred sales charge (CDSC) fees to the three main issuers," said Tillinghast.

"That is what mutual fee securitizations are basically, they're monetizing their income strengths and their fees," added Denkler.

When it comes down to readying up to do a transaction, the company likes to look for subtle distinctions in the issuers. The three companies that it has worked with has been Citibank, Putnam Lovell Securities and Constellation Financial Management.

"With every transaction we like to look at and examine the diversification and performance of the issuer," said Tillinghast. "We only work on the most senior transactions."

Even though the company is adventurous and likes to explore other asset-backed arenas, one sector that it never expects to touch ground on is the high-risk subprime auto sector, due to the fact that it hasn't seen many issuers do well.

"That is just a risky sector right now and it just would not be wise to get involved," said Tillinghast.

Stepping Up to Bat

For a sector that is known to be pretty much safeguarded, the mutual fund fee sector hasn't been tapped by many investors or issuers, but Tillinghast anticipates that the market may soon see a change.

"The increased issuance that has been recently seen has caused a flood of investors to enter the sector," he said.

But apparently, SunAmerica has nothing to worry about, having several distinctions that set them apart from the other investors that are active in this sector.

"I guess what sets us apart is we are comfortable working either with intermediaries or working directly with issuers," said Tillinghast. "We're therefore comfortable with doing an extra amount of due diligence if necessary on a new asset class. We're one of the first investors in mutual fund fees and we like the asset category a lot and I think we're big supporters of it and people in the business." - JL

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