Various changes have occured throughout the crisis in terms of the ABS investor base, according to speakers at this week’s Information Management Network ABS East conference.
For one, investors are now more flexible. Jeremy Ebrahim, a syndicate trader at UBS, said that former triple-A investors are now buying the lower-rated tranches of ABS deals for as long as they remain senior in the capital structure.
The composition of the investor base has changed as well. Ebrahim said that many former ABS and MBS investment bankers are now on the buyside. As a result, new buyers, he said, really understand structure and are able to do special types of trades that were not done before.
Paul Colonna, president and chief investment officer in fixed-income at GE Asset Management, said that investing in ABS has changed on three fronts. These are: trading, research and public policy.
In terms of trading, Colonna said that pre-crisis there was good transparency and tight spreads in the market. During the downturn, there have been many distressed opportunities. Currently, the market is characterized by credit intensive trades similar to those in the high yield sector.
There is also more emphasis now on loan level analysis parlayed with research on the macro environment.
Aside from these, investors now have to keep close track of public policy developments, specifically those from the Federal Reserve, the Securities and Exchange Commission, the U.S. Treasury and the Federal Deposit Insurance Corp.
Anatoly Burman, senior managing director at Aladdin Capital Management, said that it is not the type of investments that have changed but how investors are looking at the assets with repect to their investments. “Now people are doing their homework,” he said.
There has also been more progress in terms of increased disclosure via Reg AB. Bob Behal, co-head ABS/CMBS investments at Vanguard Group, said that with the higher level of disclosure, investors can be more independent.
Meanwhile, Colonna said that Reg AB and other rules are helping around the margins and to some extent but he said that investors are not really changing “the core process of everything we did.”
Panelists also talked about the current challenges in making investment decisions.
A challenge that Ronald Mass, head of structured products at Western Asset Management, mentioned was that trustees might not get paid enough to fulfill their role when a securitization deal runs into trouble and the issuer stops providing information on the transaction. “You really rely on the trustee, but they are not paid for the work and did not sign up for it,” he said.
Another challenge is determining the tail risk of the securities that investors own. One of the difficulties is understanding what the servicers are going to do in terms of the troubled loans and finding out the borrower’s willingness and ability to pay their obligations. One question that investors ask is whether these loans will be modified.
Panelists noted that newly orginated loans are showing much better performance, although these might not be securitized. However, the secondary market is a completely different ball game, they added.