With the recent volatility in the asset-backed market, investors - who get hardest hit when the going gets tough- should let their voices be heard louder, said participants at the "Investors' Perspective" panel at the American Securitization Forum's ASF 2004 conference.
Often-outspoken Daniel Stachel, head of fixed-income research at State Street Global Advisers, headed the pack and entertained the audience with his blunt views on his colleagues in the business. Stachel is also chairman of the market and standards committee at the ASF.
The panel was an exercise in evaluating the performance of the
various participants in the ABS market namely: issuers, rating agencies, bankers, trustees and investors. The main question for the day was, "Are the various market players living up to investors' expect- ations?"
In terms of issuers, Stachel said that he was disappointed at them for not implementing the standard best practices that the ASF has set forth. He said that
for these standards to be effective, the ASF has to make sure that there's a follow-through from market participants. He cited the stonewalling of disclosure by issuers in aspects such as underwriting and FICO score distribution.
Bankers were also put in the spotlight. Jeff Clapp, a portfolio manager at Barclays Global Investors, said that this group deserves credit for structuring deals. "We really look at the dealer community as a source of data," Clapp said, explaining that bankers are usually very responsive to investor issues. Stachel said that there is a certain level of due diligence that is not as rigorous as it should be. Other panelists mentioned that they would like to see less pre-allocation in deals.
Rating agencies under scrutiny
Participants said it is a shame that the market only talks about rating agencies when something goes wrong. However, panelists asserted that the recent downgrades mean rating agencies are actually "on top of things."
Josh Anderson, vice president at PIMCO, said that there is a need to adapt new structures and technologies to rating transactions. For instance, when it comes to evaluating the effects of interest rates on deals, the forward curve may not be the best test. In this case, he explained that rating agencies should make use of methodologies that capture the right interest-rate stresses.
The problem, said State Street's Stachel, is that rating-agency income does not come from tools that they provide to investors. Issuers, in reality, are the rating agencies' clients.
Rating agencies, he added, often do not reveal to investors the information that they are told by issuers. However, the irony is that when deals come apart, investors are the ones who truly suffer.
J. Douglas Murray, moderator of the panel and group managing director at Fitch Ratings, cited the difficulties of having a staggering number of deals to track. "Help us out!" he exclaimed. There is also the need for greater surveillance of servicer ratings, with panelists emphasizing the stronger backup servicing arrangements.
Investors rate themselves Investors were the last group to be rated. Stachel said that a lot of the problems in the industry are allowed to continue because investors are not demanding enough.
This is a part of the reason Stachel chose to become an active participant of the ASF, he said. Also, size gives larger investors greater flexibility that is not available to many of the smaller players.
"I would give investors a C; we don't do a particularly good job of asking for what we need," he said.
PIMCO's Anderson said that the volume of deals can make it too easy to base investment decisions on broad statements. For instance, for the CDO sector, one is "diversity can be a bad thing." The market, Anderson observed, is "getting comfortable with simple assumptions."
In conclusion, Murray said the lesson for the market is to "slow down a little bit," adding that the time has come to focus on enhancing the quality instead of just growing the volume.