Investors have been busily scouring the market for yieldy-yet-secure paper to get money out the door. To that end, U.S. Bancorp Piper Jaffray has been serving up alternative asset-backed transactions that have helped to sate investor appetite.
"The market has a strong appetite for well-structured, alternative asset class paper," said Tom Baurle, vice president in Piper's taxable originations group. According to Baurle, one investor noted that, while he was happy enough with his $30 million allocation, he still had another $600 million to put to work and chided him about getting started on the next one. "This kind of demand is obviously going to drive our focus," Baurle continued. "There's a lot of money chasing few deals, and investors are anxious to get their money to work."
Baurle noted that the market continues to suffer from a bit of "sticker shock" on absolute levels - variable- or fixed-rate. If an investor can devote additional resources and make a commitment to deeper due diligence, he said, they can go into alternative asset classes and grab, in many cases, two to three times the spread they would have gotten in the public markets.
Baurle's group's platform consists not only of structured products, but of project finance and private debt as well. In the project finance area, the company is involved in alternative fuel initiatives, specifically ethanol projects. Piper has also looked at some wind farm deals, and while the firm is staying in touch with that market, it has yet to do any deals.
Roughly one year ago, Piper closed its second ethanol power plant facility, located in Iowa, for Midwest Grain Processors and is currently engaged in a transaction for another such plant to be constructed in Rochelle, Ill. Equity raising is set to begin in January, with debt syndication following soon thereafter.
For Piper's clients, however, many of which are commercial banking clients of the bank, revolvers are getting tight and bank holds are being limited. In many cases, according to Baurle, the capital markets solution for these clients takes the form of a securitization.
"Given our company's focus and our largely middle-market client base," he explained, "if those clients want to tap the capital markets by virtue of issuing private debt, by and large they're going to fall in to the weak NAIC-2 or strong NAIC-3 category - a category with limited appetite." Alternatively, Baurle continued, many of these clients have an asset class or receivable that makes securitization a good fit and a better alternative from a cost-of-funds perspective.
The most recent example of this is Piper's $50 million transaction for the California-based MONEX Companies, which specialize in precious metals sales, trading and investments. The precious metals backed deal consisted of $43 million of series 2002-1, class A senior secured notes; $4.45 million of series 2002-1, class M secured mezzanine notes; and $2.55 million of series 2002-1, class B secured subordinated notes issued by Concord Funding LLC, a special purpose entity that finances the activity of the MONEX Credit Company and MONEX Deposit Company.
Of course, no discussion of esoteric ABS would be complete without mention of the recent fraudulent activity of National Century Financial Enterprises (NCFE). Some market players have speculated that the fraud could have a contagion effect on the broader securitization market.
"Is this kind of thing going to drive people away from the market? No," Baurle said. "It certainly created some vibrations as well as some opportunities, but for every situation like that you have thousands of issuers whose deals maintain the integrity from start to finish. The NCFE situation was a hiccup relevant to the bigger picture, but I think that it created a heightened awareness and that buyers, consequently, will drill a bit deeper into some of these credits and transactions. The buyers on our MONEX transaction, in many respects, may have drilled as deep, if not deeper, than the credit agencies."
When asked if the scandal would affect Piper's business, Baurle responded that his aim is to get buyside players with whom he has existing relationships involved early on in the transaction. Combined with Piper's legal team at McKee Nelson and his own team, Baurle feels that they can better insure the likelihood of successful and well-structured transactions. "Hopefully," he added, "that number of hands involved in a deal will help to avoid situations such as that at NCFE."
So what's the plan going forward? "The reach for yield is driving the pursuit for alternatives," Baurle said. We're going to have to step farther out onto the ice and take on a little more credit risk, but I think with the right legal team and intermediary - and if you're prepared to perform deep due diligence - our position is that it's well worth the time."
