The Williams Capital Group L.P., a boutique shop more frequently seen as a co-manager on new issue corporates and ABS, aims to increase transparency in the underserved niches of the market by focusing its new secondary trading desk on the most illiquid bonds available. As co-heads of structured products for Williams, ABS veterans Armand Pastine and Bradley Young plan to make Williams a shop that can provide bids on the most credit-sensitive of assets.
Anyone can put a level on five-year credit card floaters, but Enterprise Mortgage Acceptance Corp. 2000-1 A2 paper is a more difficult assessment. Additionally, removing EMAC from a portfolio - even at a loss - may be the trade of the year for the manager. For investors willing to take the risk, this also may be a positive move.
"Recent downgrades suggest the rating agencies are starting to look at the value of the underlying collateral, instead of subordination levels," Pastine said. "That takes a special kind of analysis few investors make regularly." Pastine puts a bid for EMAC 00-1 A2 paper at somewhere in the 50s, although no trades were reported at any level.
EMAC 00-1 paper still has value for some investors, despite delinquencies seen around 30%, with the proper analysis. "Delinquencies for this vintage could hit the 50% mark down the line, just like the 1999 deal - it's the same issuer and underwriting process," adds Pastine. "Assuming a 20% recovery rate, these are rated bonds (Ba1'/BB'), and value remains at some level."
Williams hopes that this strategy - staying out of the largest, most liquid sectors of the market - will pay off as the firm builds a reputation as experts in down-in-credit classes within sectors few will touch. Also dabbling in home equity and subprime auto ABS, the team plans to start developing bids for distressed CDO product in the near future.
Pastine, a principal within the company, has over 11 years of fixed-income trading experience and, in addition to his six years at Prudential (1991-1997), has worked at Goldman Sachs and Links Securities. Young, also a principal, has over 15 years of experience in fixed-income markets, including six at Prudential (1987-1993), as well as stints at Bank of America, Nomura Securities and Greenwich Capital Markets.
While Pastine has a background in dealing with opportunity funds, Young has dealt more with serving insurance companies in the past, giving the duo unique complementary roles. Pastine's experience with distressed asset purchasing opportunity funds will combine with Young's connections with insurance companies, as many have gradually changed their collective strategies to a more total-return approach, as opposed to the conservative buy-and-hold investment theme that had identified the portfolios in the past.
Pastine and Young began at Williams in April and even though they do not have the balance sheet capabilities of a bulge bracket, "We compete in areas of low liquidity," Pastine points out. The only real competition in this segment of the market is United Capital Markets, viewed as somewhat of a "friendly competitor" by Pastine and Young.
While the focus on illiquid subordinated paper is the same, United Capital Markets takes more of a hands-on approach, frequently taking long positions in the bonds it trades, while Williams plays the more traditional role of lining up the buyers and the sellers.
Williams is better known for its role as a somewhat active co-manager in primary ABS, MBS and high-grade Corporate fixed-income markets. To date, Williams has been included in the selling group of ten ABS transactions, including three apiece for American Express and Nissan Motor Credit, totaling over $13.9 billion in supply this year.
The hope is that by further developing relationships with buyers and sellers of the most difficult-to-place classes of ABS, doors will open in the underwriting business. With established relationships with a diverse array of qualified institutional investors, Pastine and Young should give Williams an advantage over most bulge brackets in placing - rather than just taking onto its books - the more challenging lower-rated tranches of an ABS offering.