Michael Binz, a managing director at Standard & Poors, said the degree of enthusiasm in the securitization market was where it had not been in years. "A year ago, the mood was starkly different," he said. "There were fewer investors participating, supply was rapid diminishing, and regulatory uncertainty was stifling market activity." By comparison, "Today many sectors of the market are rallying, investors have returned, there's a level of enthusiasm and demand we haven't seen in years." Also, "there's a degree of regulatory certainty taking shape."
Last year was a good year for spread products, said Gagan Singh, chief investment officer at PNC Bank, a view echoed by others at the conference. The tightening, he said, was both justified and a long time in the making. But after such a strong rally in 2012, Singh said, certain asset classes are already looking rich. This year, sector and security selection willl be important.
One sector where spreads are likely to keep tightening is collateralized loan obigations. That's partly because CLO spread tighening to date has lagged that in other sectors, such as commercial mortgage backed securities. Leland Hart, a managing director at BlackRock, said scarcity of loans that are good candidates for CLOs will also contribute to further tightening. The demand side is not in question whatsoever, Hart said.
The REO to rental market has come a long way since Fannie Mae first announced plans to dispose of a large prortfolio of real-estate-owned homes. A year ago, the idea of a lending against a large portfolio of leased homes was foreign concept, whereas people have gotten their heads around the combination of the security and the assets and the cashflow generated, said Gary Beasley, managing director of Waypoint Homes. He said most money center banks have term sheets out or facilities in place to finance the warehousing of these properties. On the other hand, yields on REO to rentals are not as attractive as they were a year ago, before there were so many investors bidding them up. Still, Beasley said, the potential returns are better because players have a better view of how they could ultimately exit the investments.
Among the many hurdles to issuing coverd bonds in the U.S. is that the market does not have the vocal champions that other businesses do. While covered bond havent had any big detractors, they havent had any big supporters [either], said Anna Pinedo, a partner at Morrison & Foerster.
For those that do want the market to happen, they need the FDIC to come on board. The regulatory agency is leery of having strong assets ring-fenced for the benefit of bondholders in the case of a bankruptcy. But Pinedo said that there was talk that the agency could be amenable to covered bond legislation that would set a cap on the volume of covered bonds issued by a bank as a percentage of its total assets.
After last years false start, the GSEs plan to introduce risk-sharing bonds this year. Mark Hanson, senior vice president of securitization at Freddie Mac, said the agencies hope to issue pilot transactions this year before setting up a more programmatic approach. The commitment is as strong as ever to get that done in 2013, he added, saying the GSEs do not have to wait until they have launched the single securitization platform to move forward on this product, although once that infrastructure were in place the issuance of these bonds could be sizable.
Regulators risk stifling a recovery in the securitization market if they subject privately offered securities to the same disclosure and reporting requirements as public offerings, SEC Commissioner Troy Paredes said in a keynote speech. The commissioner noted that he had supported proposal of Regulation AB II rules last year in large part to give the financial industry the opportunity to provide feedback. But he said he is concerned that the proposals might go too far in treating the private market like the public market. "Generally speaking ... the private market ought to be treated differently. Paredas said, adding that the sophisticated investors who buy these securities can fend for themselves.
Highlights from the American Securitization Forum's 2013 conference in Las Vegas
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