We are responsible for stopping next bubble, say investors
The asset-backed securities investor community is responsible for preventing a new bubble in the sector by holding issuers to higher underwriting standards, a group of buyers told an audience on the final day of the ABS East conference in Miami.
With spreads across the ABS market being compressed by strong appetite from investors, and more of them heading into esoteric products in a hunt for yield, many market participants are concerned buyers could turn a blind eye to underwriting quality.
In a snap poll 71% of the audience said asset quality had improved in the last two years, compared to 21% who said it had worsened. Ken Purnell, a portfolio manager at Invesco, said the onus was on the buy-side to ensure standards don’t slip.
“Ultimately the responsibility for underwriting and structuring falls on the investors,” he said. “It should be dominated by the free market and if investors aren’t comfortable with the collateral or structure they should demand higher spreads.”
A race into more esoteric products is causing particular concern for many market participants, and the panelists left no doubt that many investors are venturing into unfamiliar areas in search of yield.
“It’s really tough for forced buyers,” said Brian Loo, managing director at Garrison Point Capital. “If you are in any kind of index product where you are forced to buy at these rates then you have to start getting creative and think a little bit more about what you can do in private financing.”
Loo pointed to the pick up in shipping container ABS issuance as one example of more esoteric asset classes gaining popularity with traditional flow ABS buyers.
“Container issuance has picked up dramatically since 2012,” he said. “Coming out of the crisis you could buy container bonds at 40 to 50 cents on the dollar and no one would touch it, but now they are at par and offering limited pick up to flow products there are buyers there.”
“Whenever you see buyers whose comfort is based on the fact that prices have gone up, there is a risk. That reflects on the fundamentals.”