Nineteen ninety-nine saw the birth of a new way to help bring emerging markets issuers to the capital markets: the Overseas Private Insurance Corp. guarantee. A number of bonds were issued with the backing of the OPIC guarantee, but while the market did participate in these transactions, a group of institutional investors gathered together in early February in New York at a Fitch IBCA conference focusing on Latin America and Turkey, were firm in stating their preference for asset-backed securitizations rather than OPIC-insured deals.
The OPIC product guarantees against transfer and convertibility risk, but these are only two issues on a long list of risks investors in the emerging markets have to take into account, said Willma Davis, second vice president and portfolio manager at John Hancock Life Insurance Company. "[The OPIC product] is a product with limited use," she said.
Most investors are more interested in whether or not a particular corporate has a steady stream of dollar revenue, Davis said, and these are what an ABS deal successfully captures. Asset-backed transactions are therefore more attractive to long-term players, she said.
What really counts is a constant flow of dollars, said Edward Ohannessian, a vice president at CIGNA Investment Management. "We always look for the dollar flows," he said. "The OPIC insurance doesn't add a tremendous amount [to risk coverage]. It's nice to have, but we wouldn't take an [OPIC-guaranteed] deal if the [borrowing] company didn't have strong dollar flows."
Matthew Toms, second vice president in Lincoln Investment Management's private placement group, agreed with Davis and Ohannessian. While most institutional investors feel more comfortable with insurance from OPIC as opposed to the coverage private insurers have to offer, the deals the OPIC product backs are still less interesting than their ABS counterparts, he said.
This is not to say, though, that investors are not selective in their choice of ABS deals. Indeed, many are feeling "saturated" with what seems to be an endless stream of asset-backed deals from the same issuers, Toms said. "How much Pemex can you have?" he asked.
There has also been a glut of ABS issues from emerging markets banks, Turkey's in particular, Ohannessian pointed out. This year, investors would like to see more ABS issues from other sectors, he said.
As the year unfolds, all three investors who participated in the panel discussion will be looking to put more cash to work and will be keeping their eyes open for asset-backed transactions in particular. And there are going to be a number of these forthcoming, said Noel Edison, a managing director in Banc of America Securities' London-based international ABS group, who also spoke at the Fitch IBCA conference.
Unfortunately for U.S. investors, though, many of the new issues will come from the Turkish banking sector. But, Edison said, ABS deals are also expected from a range of other emerging market countries, including South Africa, Poland and countries in the Persian Gulf.