ORLANDO, Fla. - For the 400 or so registered attendees at last week's Standard & Poor's Structured Finance Seminar, the weather was to die for - clear skies, nonstop sunshine, zero humidity with a breeze. Held at Walt Disney World, many participants brought their families along to play while they worked. And of course, there was lots of golf between sessions.
It was a blend of business and pleasure.
People seemed happy with the seminar. "I like rating agency conferences," said one investor. "They still make you feel like you come away with something."
Even talks about the current recessionary environment did not bring any storm clouds. As keynote speaker and former labor secretary to the Clinton administration Robert Reich said, concentrating on what the next Fed move is and its effect on the economy is like "keeping our eyes on the small issues, not on the big issues."
The real challenges that face the country today are global integration, changing competition rules and the aging of the baby boomers. With increased life expectancy, the government may have to support them many more years after retirement. The depletion of government resources because of this is a greater issue then what the next Fed move is going to be, Reich said.
Meanwhile, in the asset-backed researcher roundtable session the short-term economic forecast was still an issue.
Merrill Lynch's Dan Castro was the most bullish as he predicted only a 10% likelihood of the country going into a recession. Despite the optimism, however, panelists agreed that we are definitely seeing specters of a slowing economy - an expected pick-up in bankruptcy filings and an increase, though moderate, in credit card charge-offs.
The busiest sectors in public asset-backeds are the credit card and auto sectors. According to Alex Roever from Banc One Capital Markets, one of the panelists, an anticipated $60 billion in credit card issuance is expected in 2001, mainly driven by the need to refinance $33 billion of credit card transactions before year-end as well as the return of First USA, which is planning to securitize $6-8 billion this year. In autos, about $70 billion worth of deals is expected to come to market this year as auto issuers continue to find cheaper execution in the asset-backed arena.
The panelists tempered their forecasts for student loans, however, because Sallie Mae has indicated that it would likely not issue as much in 2001. Banc One's Roever predicts $18 billion of student loan issuance for the year.
Asset-backeds, as a whole, are still considered a safe haven compared to other spread products, especially in light of the refi wave in mortgage-backeds and the current volatility in the corporate market.
However, some assets - credit cards, autos, and student loans - are safer than others. Panelists were wary of rising delinquencies in the equipment sector and were definitely less enamored with CDOs and manufactured housing.
Credit concerns taint these sectors as defaults increase in CDO land and threaten manufactured housing.
"Workers rely on overtime to pay loans and overtime is at a ten-year low," said Merrill's Castro addressing the risks in the manufactured housing arena.
Credit Suisse First Boston's Neil McPherson, however, went out on a limb to defend the sector, saying that there are bright spots in the asset class as we are seeing better credit support and a big player like Greenpoint raising FICO scores.
ABS investor panel
In the ABS investor panel, the specter of beleaguered FMAC continues to hover, and the franchise sector seems to be taking the most beating, along with what is still considered a nebulous asset class, CDOs.
Concerns were raised over how franchise loans are valuated. Investors also remained skeptical about the collateral that goes into CDOs.
Panelists said that CDO managers often invest in marginal assets and buy into credits they know nothing about just to achieve diversification. They also said that loans that other people reject still ultimately end up in these pools just to achieve volume.
Additionally, according to the panelists, rating agencies look at diversification in terms of industry and geographic diversification, often not accounting for diversification within credits.
The role of the servicer was also emphasized. Total return investors, for instance, may find some appreciation in a headline name like Conseco. While this may be shaky from a corprate standpoint, investors may find good appreciation through the servicing of the loans.
During the RMBS issuer panel, the hot topic was deep primary mortgage insurance. Panelists said that the jury is still out, and there is still a little bit fear of the unknown, as there is no sufficient historical data on the use of this product on the subprime level.
People also talked about the strong theme of consolidation in the industry. Clearly, panelists said, economies of scale have ruled. Consolidation also caused two formerly separate ways of business - prime/subprime - to cross paths. Companies have thus resorted to segregating products by shelf, panelists said.
Thomas Warrack, a director at S&P, did a presentation on the changing landscape of RMBS. The market that used to be dominated by specialty finance companies is now being invaded by investment banks. Chase and CSFB were included in the list of top ten issuers for 2000.
Other important topics were predatory lending as a main source of headline risk, the penetration of GSEs as insurers and investors, the increased interest in the securitization of net interest margin securities as well as scratch-and-dent deals and a market overview of HLTV and Heloc transactions.