Buysiders speaking at an investor roundtable panel said that understanding ABS collateral is key to structured finance recovery.
These remarks were made at this week’s Global ABS 2011 conference held in Brussels.
“We have to understand as an industry what the risk-rewards are,” said Sanjeev Handa, managing director at TIAA-CREF. ABS industry participants, he added, should understand that these assets are also subject to cyclical factors.
Those who have the ability to buy and hold without being subject to callbacks have been rewarded for hanging on to their investments. Good analysis, which is not based on prices, pays off, Handa said.
Meanwhile, Alistair Jeffery, executive chairman at the Bluestone Group, that it is “simply a confidence issue.” What happened in the past was that “the risk diligence protocols broke.”
Like Jeffery, other speakers at the panel also made references to pre-crisis securitization practices as a form of compare and contrast.
Jeroen Bakker, portfolio manager at IMC Asset Management, said that previously there was both a liquidity and a complexity premium, which are back now. Investors, he said, need to understand what they are buying. However, he acknowledged that the pre-crisis leverage can no longer be funded currently.
Menno Van Der Elsaker, head of European ABS at APG Asset Management, noted the positive aspects of certain regulatory initiatives, specifically those of the European Central Bank and the Bank of England. He noted that there should be some kind of industry initiative to demonstrate that ABS is a good product.
Handa also highlighted the need for broader discussion. “Some of the rules become so opaque that we are losing what we are trying to regulate,” he said. “Keeping our eye on the goal will help us with what we want to achieve.”
Buyers should not rely on ratings, according to some of the panelists. Investors, Bakker said, have to do their own analysis and the ratings on ABS deals should just be taken as they are.
Handa stated that ratings, which measure risk, remain an indispensible part of the ABS business. But, the focus on triple-A, he noted, is not good because not everything designated as triple-A carries that risk profile.
However, Van Der Elsaker said, “It has nothing to do with ratings, but it has to do with supply and demand. It’s all about funding if you’re playing in the senior part of the capital structure.”
