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ABS investors on the lookout for opportunities in next recession

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By Max Adams
21 Sep 2019

Market participants are turning to deals with tighter documentation and stricter lending requirements as a downturn nears, with the non-traditional lending sector set to play a larger role in the securitization market once the slowdown hits.

“I think planning for a recession for a lender or an investor is really no different than it had always been in terms of solid underwriting and due diligence,” said Kevin Gibbons, managing director of Amherst Pierpoint Securities on a panel Sunday afternoon.

Loans highlighted as being particularly at risk during a down turn include transitional real estate loans, deep subprime auto loans and so-called “fix and flip” mortgage loans.

“I could see that losses could be higher than people are expecting and underwriting because of the fact that they are one step removed [from the issuer],” said Gibbson. “We are all structured credit lenders. If we are doing things the right way you get all your money back. But there are a host of risks embedded in there.”

“There is a demand out there for some of these distressed “fix and flip” loans,” said Andy Pollock, senior relationships manager of enterprise sales at Radian, citing lending practices that were putting certain investors on edge. “There are more fall-back positions than we ever thought were available before.”

Some market participants were excited about the opportunities presented by a recession and remained confident that opportunity would remain for lenders even if the investor base is diminished during the next downturn.

“We think that even smart investors don’t realise the liquidity premium they pay, it doesn’t make sense to us,” said Michael Weisz, founder and president of Yieldstreet.

Weisz said that fear-based decision making and liquidity issues create value opportunities for certain investors and lenders who can benefit in a downturn.

“Yes, there is going to be a subset of investors that leave the market because of what they are willing to spend, but that is what I’m excited about,” said Weisz. “Today we have 200,000 users – hopefully by then we will have five to ten times that value. If 50% are gone, great, if 80% or 90% are gone we still have an enormous capital base.”

When asked about pricing risk, Brian Herr, chief investment officer and co-head of structured credit and asset finance at Medalist Partners said his firm is looking for securitization deal documentation with tighter covenants as a slowdown approaches.

“We look for assets where we have a greater degree of control,” said Herr. “For us it is one or two-year type loans; high singles, low double digit note rates and [less than] 65% LTV ratio. Outside of that, we don’t really touch it.”

Medalist Partners has also has set up a program to start funding charged-off loans in anticipation of defaults.

“It may draw down zero, it may draw the entire facility, but at least we are set up in a way where, should that impending recession hit, I think we are set up to draw capital and put money to work under stressed levels,” said Herr.

Valerie Kay, senior vice president of institutional business at Lending Club said that more and more investors are “trying to go beyond the banks to obtain capital in these times,” a market dynamic set to increase during the next downturn as traditional lenders continue to give ground to the non-bank sector.

“Some of these bespoke and esoteric markets I don’t think will continue to be bespoke and esoteric on a go forward basis,” said Herr.

By Max Adams
21 Sep 2019