Issuance of asset-backed securities (ABS) has risen in response to demand for reassurance on credit ...
Issuance of asset-backed securities (ABS) has risen in response to demand for reassurance on credit safety and the difficulty for companies in raising equity.
The complex nature of the securities means considerable research is required before investors can confidently buy into some of the issuance, and accordingly fund managers say they are building up their credit analysis resources.
Credit Suisse director of UK fixed income Kevin Adams says while ABS are treated as part of the corporate bond investment class, their call on specific assets gives extra security to investors.
'These are direct assets that the ABS holders have backing the bond they are buying. With standard corporate bonds, there is just a company behind the bond rather than specific assets you can get your hands on,' he says.
'Issuance is growing as investors look for areas to get exposure to corporate bonds but with less risk of default than they might find among some of the other candidates in the market.'
Adams has exposure to high-quality property-backed issues, which are more transparent and readily understood than those based on assets such as credit card receivables.
Rub Gulden, head of credit at Lombard Odier, says his ABS exposure is also limited to AAA-rated securities due to the difficulty of analysing lower-rated issues.
'It is time consuming to go through the structures and legal aspects of the products,' he notes. 'The lower down the scale you go, the more checking is necessary in addition to that undertaken by the rating agencies.'
His firm is planning to increase its analytical capacity for asset-backed securities to keep up with growth in the market, as companies look for ways to realise asset value rather than open market sales, where assets are likely to bring less than the desired price.
'We use asset-backed securities in liquidity funds,' he says. 'So apart from the high rating, we also require a certain amount of liquidity and, therefore, will go for the bigger type of issues like property deals and credit card issues.'
Threadneedle bond fund manager Trudie Rothery says some managers' aversion to lower-rated ABS is driving the issuance of AAA-rated credit-wrapped issuance and reducing the availability of higher-yielding stock.
'We are capable of doing the credit work, and prefer to be further down the credit curve and get the yield for investing rather than invest in a wrapped AAA,' she says.
AAA-rated monoline insurers guarantee tranched debt issued by lower-rated entities, which pay the insurer a fee in return for the increase in the rating. The fee is less than the interest the company would pay on its lower-rated tranched debt on a standalone basis, and hence costs the borrower less.
Investors may also need to assess their exposure to the insurers providing credit guarantees on their ABS holdings, Rothery adds.
'We need to think about how much exposure we want to these insurers and whether we actually want to buy AAA-wrapped tranches, because it takes away from our yield,' she says. But there are still benefits for investors, with ABS-structured deals generally more ratings stable than other corporate bonds.
Investor gets a degree of asset protection.
Issuance increasing so liquidity will improve.
Generally have ratings stability.
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