An increase in issuance in private 144a format since the crisis and emerging structures and securitization asset classes were all the subject of some scepticism by the panel, composed of ABS investors.
The panelists broadly agreed that they have significant funds available for 144a deals, which have become a larger part of the ABS market since the crisis, but that they suspect some issuers of using it to get around regulations.
“I don’t think we’re looking to increase 144a allocation to [otherwise] public issuers that are looking to reporting arbitrage and avoiding Reg AB,” said Scott Seewald, managing director at New York Life Investment Management.
Seewald added that “as the regulators see that and they want to start putting in broad brush requirements in the 144a market as well, that isn’t necessarily a positive” since it could result in investors getting have access to the kind of information regulators think investors need to assess credit risk, not necessarily what they actually need.
When asked what emerging asset classes and innovations might in store for the ABS market, Alessandro Pagani, portfolio manager at Loomis Sayles, said that securitization doesn’t necessarily lend itself well to asset innovation, since it is a product that requires performance history for proper due diligence. Rather, he said, it is the structures that tend to be innovative. But that’s not necessarily a good thing for investors, either.
Pagani pointed to the credit risk transfer MBS deals from government sponsored enterprises like Freddie Mac. GSEs, whose debt is implicitly guaranteed by the U.S. government, compose the vast majority of the mortgage lending market.
“We’re institutionalising an originate-to-distribute model in the highest level,” Pagani said, referring the practice of originating loans for the sole purpose of selling them to third party investors.
John Vibert, managing director at Prudential, said he was sceptical of the emerging marketplace lending ABS asset class, despite deals from such issuers coming at yields indicative of high levels of appetite for those investments.
“There’s something about marketplace lending which is a little too clever by half,” he said. “You have a technological disruptor [the marketplace lender] who is ostensibly the underwriter, but really the originator is a … bank in Utah which [holds the assets for] 48 hours to 72 hours … before it gets transferred to someone who may or may not have the underwriting ability.”
“Theres an aspect to the trade which gives us pause,” he continued. “It seems a little too much like regulatory arbitrage.”