Thriving on challenge, Lincoln Investment Management Inc. is pushing ahead with future-flow transactions in a market that seems to favor existing asset businesses that lack structural enhancement.
"We have done one existing-asset securitization, but for the most part, we try to focus our efforts on doing future-flows, whether it's export receivables or credit-card deals," said Paul Aronson, vice president of international structured investments at Ft. Wayne, IN-based Lincoln.
With an international asset-backed securities portfolio of $900 million, up from $400 million two years ago, the company's well-developed strategy seems to be on target with what it takes to succeed in emerging markets at a time when many are finding that sector to be a costly place to do business. Nearly two-thirds of Lincoln's international asset-backed securities portfolio is future-flow related. The remaining one-third derives from multi-lateral and insured transactions.
Sticking to the Plan
Such a heavy concentration of future-flow bonds is a rarity among emerging market investors, however, as the rest of the investment community focuses on existing asset businesses with less structural enhancement.
The development of local capital markets, an established comfort level with emerging markets, and more positive history in most countries has contributed to the recent phenomenon.
But even as future-flow volume declines, Aronson is confident to move ahead with Lincoln's present strategy.
Why? With Lincoln's ambitious and aggressive mentality, it has experienced success in this arena. In recent times, Aronson said there has been a variety of transactions coming out of Latin America, especially from Mexico, Brazil and Argentina.
Several of the negotiations in these countries have provided a positive economic return on the company's portfolio. Indeed, some of the many purchases made in the fourth quarter of 1998, following the bond market volatility sparked by the Asian crisis - when investors were conscious of risks - have performed well.
"There are several in our portfolio that we feel very good about, [Turkey's] Akbank, [Argentina's] YPF, [Mexico's] Pemex, [Venezuela's] Pdvsa and [Mexico's] Samarco," Aronson said.
Samarco, an iron-ore export trust, was a transaction that Aronson found quite intriguing. After the Mexican peso devaluation and the Latin American crisis in 1995, Samarco effectively doubled its capacity through the issuance of a structured export note. This past summer, the company did a subsequent financing, for refinancing purposes. "I think it's been a good transaction for the company and for the investors," said Aronson.
Changing Times
When last profiled in April 1998, Lincoln was in the process of changing its strategy in order to take advantage of new opportunities in emerging markets. At that time, the Asian crisis had caused bond spreads to widen out considerably. Many emerging market issuers were also prepping cross-border securitizations, and investors were able to choose from plenty of options.
However, the same cannot be said for today's market. Though conditions in the emerging markets sector continue to improve - indeed, emerging markets debt has been one of the best performing asset classes year-to-date and bond spreads have narrowed sharply - issuance has dwindled considerably.
"Volume has, unfortunately, been quite low," Aronson said. "Spreads are okay and the growth of new asset classes has been spotty. Volume has probably gone down somewhat because there was a lot more supply in the market two years ago than there was last year and this year."
Given the way the market has turned, it has not been an easy ride for the company to achieve growth. Aronson noted,
"The biggest frustration has been that issuers appear to have been hesitant to come to market, due to a perceived lack of demand from buyers such as myself," he said. As a result, Lincoln has had to become more aggressive in its dealings, and seek returns in other areas, namely the future-flow market.
Looking Ahead
Going forward, Aronson said, "We are always open minded to look at new alternatives." That said, Aronson still wants to see volume coming from the future-flows sector, adding that bringing incremental value to the company would be the only purpose behind deviating from the current approach.
Not that he is averse to the current market penchant for deals backed by existing businesses. "The message here is if you were investing in some of these deals five or six years ago, you were probably getting a much better deal than you are today," Aronson said. "On the other hand, we still think there tends to be a lot of value in those [transactions]."
Lincoln acquired a total volume of $300 million last year in asset-backeds and is aiming to replicate that figure for this year, Aronson said.
However, having purchased $175 million so far this year, "the likelihood of doing [$300 million] is not high because I just don't know if there will be enough business," Aronson said. The direction of the market will, he said, be in large part dependent upon the direction of spreads.
