BARCELONA - Though clearly the Global ABS conference in Barcelona was primarily focused on the European markets, a few panels were addressing the state of U.S. ABS - which, from a volume perspective at the very least, is far exceeding expectations from late last year.
"I'm not sure that people thought 2003 volume would be as high as 2002 volume, but I think it's going to be significantly higher," said Joe Donovan of Credit Suisse First Boston.
Continuing a trend seen over the past few years, European investors are showing more interest in the U.S. marketplace. One buy-sider from WestHVB, for example, who is already actively purchasing U.S. MBS, said the firm is exploring the U.S. CDO market as well.
The natural trend towards globalization in ABS was a major theme of the conference. Both sides of the Atlantic are dealing with similar regulatory capital and financial accounting issues, and U.S. and European investors both seem to like the diversification pickup in out-of-country investments.
On the CLO side, one market participant noted that fewer deals in Europe are being structured strictly for regulatory capital relief, which was the primary driver of that market in Europe over the past several years. Now it appears that banks and other institutions are becoming more focused on risk and balance sheet management, as well as diversification.
One trend noted by Nico Petris of Garras Bank Naspa Dublin, is that an increasing amount of European transactions are issuing U.S. dollar tranches, some of which are not registered with the Securities & Exchange Commission.
The session, titled "United States Securitisation: Analysing Trends & Market Developments in U.S. Dollar Structures," was nearly equivalent to opening ceremonies sessions seen at the domestic ABS conferences hosted by Information Management Network.
A familiar cast of characters was there: facilitator Douglas Murray of Fitch Ratings; bankers Donovan of CSFB and Richard d'Albert of Deutsche Bank Securities; issuer Diane Wold of GMAC-RFC; investor Craig Platt of Keybank; attorney John Arnholz of McKee Nelson; market maker John Devaney of United Capital Markets; plus two non-U.S. panelists - Tom Fewings of Gordian Knot and Petris of Garras Bank.
What differentiated this session from token U.S. opening ceremonies was that it took place at 5:30 p.m. rather than first thing in the morning, immediately after breakfast. Arizona, however, is a solid eight hours behind Barcelona, so in this light, one could argue the session did indeed occur at the start of day. In fact, for many conference goers, this was roughly the "start of day," as the session was promptly followed by the "Sangria Soiree" at the Baja Club on the beach, sponsored by none other than Devaney's UCM.
The party there lasted through dawn
In all seriousness, there were a few notable differences between this panel in Barcelona and the more recent U.S. conferences, primarily in that all the panelists were markedly bullish on the economy. Even Keybank's Platt, who has been known to broadly discuss his least favorite sectors during the open sessions, was confident in the current economic indicators.
"This is the first time in a long time I've been positive on the economy," Platt admitted, anticipating that corporate earnings will turn around in the fourth quarter.
As for asset-backeds in the U.S., CSFB's Donovan commented that the recent Wall Street Journal article, which pointed to doom and gloom in ABS and created a stir in the market, was "about three months too late," as many of the credits named in the story have already begun overcoming their issues. As noted in last week's ASR - and as Donovan stated during the panel - analysts are starting to recommend moving down in credit for spread opportunity, indicating a view that the credit environment is improving.
Devaney, always an advocate of well-thought-out risk taking, commented that, "My theme for 2003 is that sub bonds and distressed bonds are an opportunity. Though that was my theme in 2002 and 2001 as well."
Devaney described a typical trade: UCM purchased senior NextCard ABS for 80 cents on the dollar; the bonds, with about 60% subordination, now trade at 98 cents on the dollar. "A lot of bonds out there with headline risk are the best bonds to buy because they have the most upside," he said.
A changing landscape
In the U.S. market as well as in the European markets, servicer risk is a development being looked at carefully. In particular, over the last year the market has seen some blowups tied to servicing fees being too thin to keep the servicer in business.
In a recent example, the U.S. regulators pushed the servicing fee on First Consumers deals to 7%, which directly eats at the credit enhancement levels. Deutsche Bank's d'Albert believes that fees for credit card servicing will level off at 4%.
The debate itself is interesting. On the one hand, investors could lose excess spread protection if it's going to the servicer instead. On the other hand, no investor wants a bankrupt servicer. As these issues are resolved, deals structures will no doubt change.
"Should fees be in the [rating agency] stress test?" d'Albert asked, noting that a strong servicer "strengthens the transaction significantly."
According to RFC's Wold, tiering tied to the servicer has trickled into the market.
Other recent developments that will impact deal structuring going forward include regulatory risk, multiline versus monoline insurance and "new structure" risk.
Obviously, one of the biggest issues concerning deal structure evolution is the "role of the trustee," evidently as hot a topic in Europe as in the U.S. Though to some extent imported from the recent U.S. controversies, European investors are equally concerned with the implications of placing "unreasonable reliance on the trustee," as stated by session facilitator Esther Cavett of Clifford Chance, on a panel called "Monitoring Securitisations: Are Trustees Making the Grade?"
"Trustees are not watch dogs," said one panelist. "They do not have a monitoring role until they are directed to."
"What investors have learned in this extraordinary credit environment over the last two years is that they have to look more closely at the deal, beyond what's in the trustee report," said Shaun Baddeley, a director at Fitch Ratings.
One of the issues at hand seems to be that investors are not always clear on the trustees' duties, although according to Olufemi Oye of Deutsche Bank Corporate Trust, "Trustees have changed and matured - we are looking much more closely at the documentation."
Interestingly, two trustees on the panel had somewhat divergent views on their responsibilities in a deal, perhaps indicative of the problem itself.
"The trustee's role is to make sure the transaction is moving as it's structured," said Shashank Mishra of ABN Amro Bank NV. "It's not our role or responsibility to go behind the scenes."
Meanwhile, Deutsche's Oye commented, in response to Mishra, "The trustee is not structuring the deal...but the trustee is reviewing the structure afterwards. We should be communicating to investors that we are there to add value."
Mishra added that the trustee is often viewed as a deep pocket.