Leigh and Tighe jointly manage E1.2 billion worth of asset-backed securities. The duo has built up the portfolio over the past six years to include about 120 positions. Leigh has worked in London for almost 20 years with a background in credit, lending and investment. Now in his second spell at Erste Bank, Leigh has spent the last six years developing the bank's investment in European mezzanine asset backed securities. Tighe has worked on the credit, lending and investment side of the banking industry for over 20 years, the last four of them at Erste Bank, where he has focussed on European mezzanine asset backed securities.
How would you describe your investment strategy?
The main word is cautious. We are focussing on mezzanine tranches of consumer asset-backed securities and residential mortgage-backed deals that are backed by granular pools. The originators have to have a track record, and we are a little cautious about going into a deal where the originator hasn't done an ABS deal before. We need to have confidence the originator can service the pool. For example, can we believe an Internet mortgage provider that's been around for 18 months can manage delinquencies in a mortgage pool? We need proof they can, and that's why we're avoiding them for the time being.
What are the major challenges you face in the current market environment?
Getting sufficient assets of sufficient quality that are at a suitable price. We're seeing more new investors coming out with funds that are either devoted to asset-backeds or have an ABS component. There are also more investors going down the credit curve and looking at triple-B paper. The new investors are helping to bring spreads in, but we have still been able to buy as much paper as we need.
Are you thinking about how your portfolio will be affected by the Basel II regulations and have you begun to make any changes to your investment strategy in anticipation of their implementation?
We definitely have started thinking about Basel II and have been for the last 18 months to two years. If we are looking to buy deals that are long-dated we're buying single-A assets because of the risk weighting. [Once the new Basel regulations are put into place triple-B some sub-investment grade pieces may have risk weightings of 350%, but triple-B rated will be no worse than 100%.] However, for the right transaction, we would still buy triple-Bs, but there would have to some mitigating factors. We are still buying lower-rated deals that mature before the implementation date for Basel II (2006).
What asset classes are you avoiding and why?
We don't like non-granular collateralized debt obligations and we don't like are the whole business securitizations. One of the things we tried to do when we put the portfolio together was to avoid any event risk or corporate risk, which is why we avoid whole business deals. Given that we're only buying deals backed by European risk, there is actually a pretty small universe to invest in CDO-wise. With CDOs, the risk is that you're buying the same names over and over again if you buy too many of these. We also want to avoid the event risk of a WorldCom or something similar.
What have you been adding to your portfolio lately?
We've been adding more of the U.K. mortgages, Italian leased-backed transactions and more of the Italian non-performing loan transactions. Italian lease deals are granular, with lots of small obligors. Typically, the leases are on the key assets of the obligor like a major piece of a plant or a delivery truck, so are similar to mortgages where people are going to try their level best to keep these payments up. In terms of NPL deals, recently, we bought Tiepolo and one or two positions that came available in the secondary market. On the NPL deals, we will only buy most senior tranches, because they are the least likely to have zero recoveries.
What kind of service are you getting from the sell-side in terms of secondary trading?
We're a buy-and-hold investor and buy mainly single-A's and triple-Bs where there is not really a secondary market. We think we get to see all the secondary positions that become available, but really there isn't very much paper around. When it comes to the primary market, some investment banks manage their syndication process better than others. Some over sell their book by four or five times, which is frustrating. But, others close the books as soon as they are confident the bonds are sold at the levels they want.
What have been your best and worst buys over the past year?
It's too early to say what are the best or the worst. It all depends on if we get our money back. Call us in five years and we'll let you know. One good trade we made this year was on a U.K. non-conforming RMBS we bought on the secondary market. Between the time of the trade and its settlement, the deal was upgraded, which gave us a warm feeling that it was a relatively good piece of paper.