For many market participants at the recent IMN/Fabozzi ABS West conference - especially investors - the issue of avoiding more blowups and finding relative value in a continually tightening ABS market took primacy over other topics.
Several sessions were dedicated to the search for relative value: In a panel discussion entitled "Uncovering Relative Value Within the Public Market," facilitated by Merrill Lynch's Dan Castro, buysiders spoke about where they are putting their money; at the Research Analyst Roundtable, headed by Anatoly Burman of SunAmerica Investments, strategists gave their thoughts on similar topics.
The verdict seemed to be unanimous: the winning sectors right now, according to analysts and investors, were foreign RMBS and stranded-cost rate reduction bonds; the losers were manufactured housing and retail credit cards.
The liquidity vs. yield
With credit card and auto ABS viewed by some as a credit risk alternative to Treasury and agency debt, investors were pondering where to look in order to pick up incremental yield within the ABS market. But in order to get this yield, most understand that they would have to sacrifice some liquidity, a move some prefer not to do.
Luckily, most on the buyside do not ride both sides of the fence, and instead stick with one strategy or the other. Amy Boothe of Alliance Capital, for instance, does not think buyers are adequately compensated for moving out of liquidity and security in the search for yield - especially when it comes time to sell.
By contrast, Terry Crow, of Metropolitan West Securities, said he was strictly a yield buyer, and is less interested in the liquidity seen in top-tier credits. In order to execute this strategy he maintains that all positions are protected. "When I buy second-tier auto paper, we are fully hedged," he said.
Those interested in yield, however, were advised to move down in credit, to double- and single-A rated cards and autos. However, investors were told to stop there, as triple-B rated securities have lost value to all except those ramping up CDOs.
Commenting on triple-B spreads, Allstate's Meg Manda stated that spreads for triple-B ABS are "artificially tight" and that without that bid, spreads would be much wider, if bid at all. Manda theorized that the yield pick-up from double- to single-A was twice what the same move down to triple-B would realize.
Avoid landmines
Regardless of which side of the yield/liquidity fence one stands, all investors have one common goal in their strategies: avoid blowups. While nobody has a crystal ball to tell them what the next Enron, LTV Steel or Hollywood Funding debacle will be, most pros advise to place bets on sectors, rather than specific issuers.
With all eyes on Conseco, most advise to avoid the manufactured housing sector. The words most frequently used throughout the conference were "seller and servicer risk." HIMCO's Jon Prestley noted: "While I am not saying Conseco will go under, the downside risk is too great. There is just no backup servicer out there that could take on an additional $30 billion."
While not bullish on the sector, Salomon Smith Barney research chief Peter DiMartino thinks the sector can survive the rough waters ahead. He believes the sector can be bolstered by "new blood" with new business strategies, hence restoring investor confidence in the viability of the asset class. There is the potential for a new entrant in the coming year, although no specific names could be disclosed. Also, retail credit cards are expected to feel the effects of the lagging economy further down the road, according to Jeff Salmon of Barclays Capital; the thought here is that things are likely to get worse for retailers, before they get better. "The big, established players: Sears, Federated Department Stores, they can whether the storm," Salomon noted.
It's the other retailers investors have to look out for however, said Salmon. "As we have seen in recent months, with the K-Mart bankruptcy and Fingerhut closing down, the retail environment is very tough. Right now excess spreads and performance look good but what if they start closing down stores?"
Additionally, the CDO sector, especially for deals backed by corporate credits, is viewed as having potential for blowups. While the need for balance sheet restructuring should always facilitate a need to sell debt-backed CDOs, both Salomon's DiMartino and HIMCO's Prestley see pressure on the market.
