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| Jeroen Bakker |
Bakker is head of asset- and mortgage-backed securities investments at Faxtor in Amsterdam. The firm has approximately E600 million under management, predominantly in European mezzanine and subordinate ABS.
What are you working on?
We are ramping up our second collateralized debt obligation of ABS and are out marketing it at the moment. Bear Stearns is the lead on this deal, just as they were on our first one. We are targeting a deal size of E350 million when fully ramped and we expect to launch it before the end of this quarter, probably sometime in May. We have been ramping the assets for this transaction since early 2003 and managed to lock in last year's spreads, which were 25-30 basis points wider than they are now.
How will Faxtor's second CDO of ABS differ from its first?
This one will be about E50 million larger but otherwise will be very similar to the first in that it is backed purely by mezzanine consumer ABS. Unlike our competition, we don't include any CDO buckets of corporate bonds in our CDOs of ABS. The underlying will be over 50% RMBS and the rest will be a mixture of credit cards, consumer loans, CDOs of SMEs and commercial mortgage-backed securities. We also expect the investor base to be broader this time around, since we have our first CDO of ABS behind us and investors who did not want to invest with a first-time manager will be coming in on our second deal. The first deal is performing well--the first payment to noteholders was made last November and the next one is due in May.
Why the focus on mezzanine ABS in Europe?
Our history is in equity tranches of residential mortgage-backed securities in the U.S., so the first thing we took a look at in Europe was RMBS equity. We found that equity tranches in Europe were a lot larger than in the U.S. In our view, this was a case of over-protection by the rating agencies. We therefore looked at the asset classes just above the equity--the subs and mezz--and found these to be very well protected and therefore very interesting. Furthermore, our loan-by-loan analysis qualifies us well for mezzanine investing.
What jurisdictions are you focused on for the underlying?
We are sourcing assets from all over Western Europe. We look at every deal out there and do in-depth analysis, which we are in a position to do since we have a team of 10 professionals looking just at Europe, as well as our own in-house systems for due diligence and monitoring.
It is fair to say that we don't rule out any country or asset class as such. That said, we are underweight the U.K. because most of the ABS there is issued through master trusts, which have open exposure to the U.K. housing market with a new tap on a given issue every six months or so. We do consider some asset classes more dangerous than others and therefore are pickier in our investments. For example, German RMBS, where we focus on risk pockets like the obvious East German proportion as well as investment properties in the portfolios which have a higher probability of delinquency.
What is your prognosis for spreads on ABS?
We have seen a huge increase in institutional demand for ABS, which is likely to keep spreads tight. The problem is that when you have small teams within a large institutional investor looking at the whole universe of fixed income, they don't have the time or the resources to look in detail at the collateral pool, and they end up selecting ABS deals based on the rating. This works if you are investing in triple-A tranches, but not when you're looking at double- or triple-B, where only one bucket has to go sour to really hurt the investor. We've seen some mezzanine deals come to market that really are not great but have sold at the same level as prime ones.
What changes will Faxtor make to its investment approach?
We are currently invested in double-B, triple-B and single-A. However, these tranches are getting smaller in deals as rating agencies are demanding less credit enhancement for the triple-A tranches, relative to what used to be the case a number of years ago when there was not any performance data yet. Going forward, we are considering moving both higher and lower on the rating scale, and looking at new sectors. With the spread on assets down by 20-30 basis points and the spread on liabilities down by 10 basis points, the arbitrage opportunity is clearly smaller than it was. In particular, we are thinking about expanding our investment in equity tranches of ABS and CDOs. There is more equity for sale in Europe now, whereas before banks used to keep it for themselves. We will also potentially be moving into leveraged loans, where 75% of the market is in the U.S.