BARCELONA - Close to 3,500 delegates attended last week's Barcelona bash, the market's largest four-day meet-and-greet, hosted each year by Information Management Network.
This year's top theme? Perhaps it was the tailspin tightening experienced by the securitization market globally since the start of the year. Or perhaps it is the record year-to-date volume in the European market.
As always, the Barcelona conference lived up to its colorful reputation for all-night, bank-hosted events, although the exhibit hall was anything but quiet during the day. In fact, at peak hours, moving from one session to another was as tight a squeeze as the line to the bar following the day's final session.
The main squeeze
Apparently, the popularity of securitization and its attractiveness to investors is still expanding. Deal pricing was the most talked-about issue last week. Whether spreads have room for further tightening was the main discussion at Tuesday morning's opening ceremonies, and the theme resonated during the breakout panels.
Supply-and-demand imbalances have contributed to the overall sharp tightening trend experienced in the market so far this year and most panelists agreed that demand will continue to outstrip supply for the time being. ABS still offers good value over the current corporate spread environment. But improving ratings stability and less volatility in the market, and the advent of improved transparency, could continue pushing levels inside of corporate spreads.
"Real money fund participation has increased and, over time, ABS has become more of a mainstream credit product," said one speaker. "Dealers have also just generally had a much stronger appetite for this product."
On the one hand, the increase in appetite has led to deals getting done quickly, but there is concern that investors may be sacrificing the chance to analyze the transaction in attempting to bid.
"There is no time to do analysis on European credits," said one speaker. "In the current environment you have to leave orders before seeing deal without any structure characteristics in hand or rating agency information.
"For CDOs, we historically had a longer period to do due diligence," the speaker added. "To an extent, products have become more standardized; there is a bit more commodity but you don't really get a chance to look at what you are buying anymore."
In subsequent discussions throughout the day, others argued that shorter execution time is a natural progression. For example, panelists pointed out, U.S. deals get turned around in a matter of hours. "It's reached the point where now the clients have to take the salespeople out to lunch. Reverse inquiry has become very important as is contacting the issuers and knowing them as well," said one investor.
Oversubscribed...
A show of hands at one of Tuesday's panels on relative value in European structured credit showed that only five U.S. investors were in the mix. "In the eyes of American investors, the European market is not really that advanced because of the quirk in structures," said one panelist.
So where is the demand coming from? Some argued that much of the growth is from European crossover investors and financial intermediaries. Whatever the cause, traditional ABS investors in Europe are disturbed by the squeeze.
Meanwhile, one panelist said that European CDOs have not enjoyed the same level of tightening. "CDO execution is a very important part of this market but the market has not come full circle and the liability side isn't contracting," the panelist said. "The worry is that people are buying diversity for diversity sake, going after products like Spanish RMBS almost like vultures."
This quest for diversity has sent spreads in to historical tights on even new asset classes like the first prime Greek RMBS deal, in the view of one speaker.
To an extent, he said, the market has ended up with a share of fair-weather investors but the trick is finding investors that will be there through richer and poorer till death do they part.
"Europe is going through some good times, spreads have come in from the worrying wider levels discussed here last year, and rating transition is positive," he said. "Now it's important that originators of assets invest in the future like enhanced reporting, building relationships and looking at the product throughout the life of the transactions."
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