The future of securitization

Throughout the conference there was general acceptance of the view that the securitization market will be around long term – the majority of fundamental securitization concepts are technically sound. The crisis identified some forms of securitization as being particularly sensitive to a market that has moved from an extended period of oversupply, tight spreads and high leverage to effectively what is now a full banking liquidity crisis (including market value structures and short vs long term arbitrage structures). The overall sentiment was less positive than at the beginning of the year. At the ASF 2008 conference in Las Vegas [on 3-6 February - ac] people were expecting the market to return to “appropriate” levels of credit and liquidity by the middle of 2009. However, at ABSummit, the general feeling was that mid-2010 is more realistic.

With the aftershocks of the funding and liquidity crisis still hitting different pockets within the financial market, banks are facing increased operational, funding and liquidity management challenges from multiple directions. Some banks with SIV capital note exposure have “swapped” this equity exposure for their pro-rata leveraged portion of the SIV assets (in general still very good quality highly-rated assets) - that are now brought onto their balance-sheet. This is known as SIV vertical slicing. Some banks that are providing full or partial support for funding or arbitrage conduits have decided (either due to the economics or through necessity) to effectively bring those assets on-balance sheet. The intensive operational challenges in managing these structured finance portfolios are compounded by the increased surveillance and risk oversight being performed by internal management. The credit investment portfolio is no longer a footnote within the bank treasuries’ operations.

A common view in the market is that the investor community is not ready to start buying back into structured finance assets – even where spreads are at the moment. There is also a belief that outside subprime RMBS and CDOs of ABS the fundamental collateral performance is sound. However, several investors at the conference indicated that it was more to do with a lack of asset availability! For a sophisticated investor to purchase a particular asset they must undertake a detailed initial credit analysis. Ongoing asset performance surveillance is essential if they then go on to purchase the asset. As such it only makes economic sense if they buy assets with a large ticket size ($15-20m+). The bid lists that are being presented to potential structured asset buyers are not large – instead populated with many odd-lot and one-off transactions. Whereas before the size to sell was large - with no real bids - now it appears that interest to sell these positions is drying up. In conjunction, buying interest for large is on the up. Sellers may be leaning against these new large buyers, especially after being further emboldened by recent fed approaches to funding. [very interesting if this is indeed widespread- ac]