In Phoenix last week, panelists on the non-mortgage research roundtable agreed that 2004 will not likely be "the year of the home run," compared to the massive tightening in just about every asset class throughout last year.
Instead of searching for the next tranche to tighten, investors should seek yield and spread stability in 2004, avoiding headlines and blowups. This is contrary to the mid-2003 recommendations to move down in credit.
Most panelists thought that seller/servicer bankruptcies and fraud presented the most risk going forward, though Nomura Securities research director Mark Adelson disagreed.
"Servicer risk and fraud are out on the table and have been dealt with in the past," Adelson opined. "The skeletons are what we don't see yet; they come out and say Boo!'"
In Adelson's opinion, correlation between the various assets classes is the major risk hiding in the closet, and has yet to be properly dealt with or identified. Adelson theorizes that correlated directional spread movement among different asset classes is more likely to affect entire portfolios and, specifically, the multi-sector CDO market.
Meanwhile, ABS CDOs were seen as a bastion of value, due to the lag time between the current ABS CDO spreads and the tightening of the underlying ABS collateral. Quoted currently in the 60 basis point area versus Libor, ABS CDOs offer a rare tightening opportunity going forward, noted Morgan Stanley's Chip Schorin.
Private and consolidation student loan product was also named as a value in 2004, although investors should be mindful of pricing speeds, panelists said. Moderator Anatoly Burman of AIG Investment Global Corp. joked, "You buy student loan paper modeled to 7% CPR, but it's more like 17% CPR."
While speeds can reach 30% to 40% CPR following the July rate reset, in the long-dated classes it is probably more in the 8% to 10% range, said Theresa O'Neil, in the research group at Merrill Lynch. Investors seeking spread tightening should look to double-A rated Sallie Mae subordinates, O'Neil added.
Fewer issuers, bigger banks
Also a hot topic among the research community: the spate of consolidation to hit the consumer finance world in recent months. While most expect this trend to persist, there were mixed feelings as to whether this is a positive development.
JPMorgan Securities research head Chris Flanagan noted the increased efficiencies of scale in newly joined entities. This, in turn, is beneficial for both consumers and investors. It also adds standardization in reporting.
Consolidation would likely change the way investors view concentration in their portfolios, a sentiment expressed by Merrill's O'Neil, JPMorgan's Flanagan and Alex Roever from Banc One Capital Markets.
Lehman Brothers strategist David Heike added that consolidation is most beneficial in the case of a highly rated seller/servicer purchasing a lower rated one, seen recently in the retail credit card market. "The increased sponsorship from highly rated seller/servicers tightens spreads throughout the sector," Heike said.
Nomura's Adelson, once again breaking from the pack, recommends five-year fixed-rate home equity ABS, which has been "one of the last places to find tightening."
Deutshce Bank's Karen Weaver, in a seemingly blissful mood, "likes everything."
"It feels like 1998," she said. "ABS is still cheap versus corporates, and I expect further tiering compression," Weaver said.
The latter is not necessarily a positive, she added, as a certain level of tiering should exist.