As many as 300 industry participants eagerly attended last Wednesday's ABS Industry Gathering hosted by the Strategic Research Institute, at the Grand Hyatt hotel in New York.
Compared to what Bermuda-bound or Bahamas-bound players were in store for, the few panels during this one-afternoon event were less excessive, broader, and somehow dire in tone.
Perhaps best stated by Deutsche Bank's research head Karen Weaver, the imminent recession is a short-term market fundamental, but that "the world is now a much more volatile place" will be factored into the long-term evolution of the securitization and structured finance markets.
"The fact is that I think it would be imprudent to run a portfolio assuming there won't be future attacks," Weaver said, criticizing analytical outlooks (not exclusively ABS) that incorporate the phrase "barring future attacks."
Still, speakers reiterated several of the positive themes that have surfaced this last month.
"That there has even been a market is something that we should be celebrating." said Joe Donovan, managing director at Credit Suisse First Boston, as moderator on an issuer panel.
Other positive themes included liquidity in both the commercial paper and term markets, the resiliency of spreads compared to corporates, and the unprecedented coming together of the market.
"[The events] have brought something back to the market that we don't always see, and that's relationships and trust," commented Vernon Wright, senior vice chairman of MBNA America Bank.
Merrill Lynch's Stewart Cutler, who spoke on the state of the ABCP market, encouraged program administrators to "tell your war stories," thereby showing apprehensive clients and investors how firms dislodged by the attacks were able to reopen shop within a day or two, rising to the various challenges.
In Merrill's case, on the first day back in business in a remote office (Sept. 13), commercial paper traders had to physically input trades with the Depository Trust Company (DTC), because of technical problems. This was how ABCP trades were handled in the late 80s, Cutler said.
Concern in the aircrafts
Though all three rating agencies have placed structured finance deals with aircraft industry exposure on watch for downgrade, to date, neither a pooled aircraft lease securitization nor an aircraft enhanced equipment trust certificate (EETC) has missed a payment, speakers noted.
Specifically on the pooled deals, Credit Suisse First Boston researcher Neil McPherson commented that industry turmoil "doesn't necessarily translate into an instantaneous drop in lease payments," and that airlines often continued operating even in bankruptcy, and would need planes to do so. Though skeptical on the near-term industry outlook, McPherson noted that, for most of these transactions, the triple-B classes could withstand an instantaneous 25% to 28% drop in lease revenue for the life of the deal without skipping a payment.
David Wilson, a senior vice president at GE Capital Aviation Services, said that as of the Oct. 2 servicing report for LIFT 2001-1, every lease is the deal is current, and the deal is moving along as scheduled, with 35 of 39 aircrafts novated, which essentially means they have been legally transferred into the trust, demonstrating that the deal has not been held up since the industry shakeout.
According to Wilson, GECAS was planning a second LIFT deal for first quarter 2002, but bearing the state of the aircraft industry, progress on the deal front is undetermined at this point.
One immediate concern for airline operators is the changes in policies the insurance companies are willing to write. For example, while pre-Sept. 11 policies would cover terrorist damage in the $1 billion range, new policies are being written that will only cover $50 million damage.
"This is a real issue," Wilson said. "If you're an operator, you either ground your planes or take your chances," adding that grounding planes is a one-way ticket to insolvency.
Trend of widening
Although the economic picture has darkened somewhat since the events of Sept. 11, participants argued that the market has, to some extent, been pricing in the threat of recession for the past several months, if not the past year.
"What has really changed is the psychology of the market," said Sanjeev Handa, a managing director at TIAA-CREF. "All our fears that we might have had before Sept. 11 have been exacerbated."
"Home-equity spread levels have been widening over the last years," said Lawrence Angelilli, of Centex Corp. "This has been the most widely anticipated recession in all of mankind."
Angelilli argued that widening real estate-related spreads have reduced access to funds, causing underwriting standards to tighten up underwriting standards and moderating speculative building, and other types of risky lending.
Since the events of Sept. 11, panelists noted that widening in other markets, especially corporates, will trickle into asset-backeds, primarily because managers will sell out of ABS positions to bargain hunt.
Head of ABS syndicate at CSFB Greg Richter noted that, "There is a widening trend for all sectors for the first time in many years."