More than 1,000 asset-backed securities executives flocked to a pair of conferences in Bermuda this week, but more people had been expected to attend.
People at the conferences sponsored by Strategic Research Institute and IMN/Frank Fabozzi said they knew of colleagues who had planned to come but decided to stay home. And some of the attendees admitted that their objective was not necessarily to learn more about asset-backed securities, but to get a break from the turmoil that has recently swept their market.
The market has seen substantial growth in recent years, with brand-new issuers emerging with deals backed by everything from funeral home profits to tax liens. Traders, issuers, and investors have enjoyed phenomenal profits and several lenders have ballooned in size because of the funding they racked up from securitization.
But the past six weeks have wreaked havoc, with spreads widening while prepayment problems and even full-scale blowups continue to plague issuers, especially in the home-equity arena.
"Sure I'm running from my problems," joked a portfolio manager from a Midwest bank, as he nervously fidgeted with a complimentary plastic toy at a cocktail reception. "I can't sleep at night. ... I think I need a drink."
For example, subprime lender Southern Pacific Funding Corp., Lake Oswego, Ore., filed for bankruptcy last week, leaving investors who hold its bonds with an asset worth only a fraction of its previous value.
And issuers who can have been postponing deals while many investors have taken a wait-and-see attitude. Consequently, issuance expectations for 1998 have been lowered-by $20 billion to $200 billion, according to a recent Merrill Lynch & Co. report.
"The ABS market has gone through a wake-up call," said John R. Wilson, managing director in the structured finance group at Prudential Investments, Newark, N.J. The ensuing shakeout is resulting in a "tiered" market, he said.
"There are a number of issuers and bankers that didn't push the envelope, that didn't push things to the edge," he said. "Those issuers are enjoying greater liquidity. We as investors remember how (the issuers and bankers) have conducted themselves in the market."
Now investors are spending more time inspecting "the financial health of the issuers," Mr. Wilson said.
The current liquidity crunch is going to "hasten the culling of the herd," said Sean Sheerin, vice president at Duff & Phelps Credit Rating Co. Issuers who attempt riskier transactions will find themselves shut off from the market, he warned.
Issuers who "thought the asset-backed market was there to clean out their portfolios were stupid," Mr. Sheerin said. Now that these companies will be forced to hold loans, they'll "grow with discipline."
Stalled deals mean that rating agencies are going "back to basics," said Kevin Duignan, senior director at Fitch IBCA, and doing "as much research as possible."
In the end the shakeout is "what the industry needed," said Henry McCall 3d, senior vice president at subprime lender United Companies Financial Corp., Baton Rouge, La. But the market is "going to get worse before it gets better," he added.