Section 2 - FTSE

More documents

Recommendations

Info

DEBT REPORT: ASSET BACKED SECURITIES 80 ABS ISSUANCE INHIBITED While no mass sell-offs had taken place by late September, some initial casualties emerged at the end of August. Among the first was the Cheyne Finance SIV, which was established in August 2005 and whose $9.7bn of assets included an unusually heavy exposure to the US sub prime market through both direct investments and CDOs. Photograph © pmphoto, supplied by Dreamstime.com, October 2007. After the first six months of 2007, European securitisation was set to break all records. Analysts were confidently expecting that new issuance for the year would exceed €500bn for the first time, as asset-backed bonds appeared to have become a highly liquid option for financial market investors. Yet within six weeks, the abrupt seizure in short-term borrowing around the world—driven by concerns over exposures to the worsening US sub prime mortgage crisis—turned the market on its head. The consequent funding problems experienced by many ABS investors sent valuations spiraling downwards. Bond spreads in the secondary market quadrupled across the ratings spectrum in some cases, forcing prospective new issuers to abandon their plans indefinitely. How did this happen, and where does the market go from here? Andrew Cavenagh reports. THE IRONY OF the collapse in the value of European asset-backed securities market is that—excepting those assets with US sub-prime exposure—it has nothing to do with the performance of their underlying assets. It is entirely down to the way a large chunk of the investor base has chosen to fund its investments. They are the conduits and structured-investment vehicles (SIVs) that are sponsored by banks and others. Worldwide they are reckoned to hold asset-backed securities worth the equivalent of $1,400bn. They finance these investments to a large extent by issuing asset-backed commercial paper (ABCP), which typically has a maturity of between three and six months. While rates on ABCP were low—flat or close to inter-bank rates such as three-month Libor and Euribor—this model provides a significant arbitrage opportunity as the ABS investments pay spreads above Libor. NOVEMBER/DECEMBER 2007 • <strong>FTSE</strong> GLOBAL MARKETS
The strategy depends crucially, however, on the ability to “roll over” the commercial paper as it falls due. As mounting fears over banks’ sub-prime exposures (both direct and indirect through collateralised debt obligations [CDOs]) cause them to stop lending to each other in the short-term markets, appetite for CP dried up and left those who relied on it for funding exposed. While the banksponsored conduit programmes have liquidity facilities (put up by their sponsors) that cover 100% of the CP they have issued—which enables them to refinance any debt that falls due for a period of at least 90 days—the liquidity facilities in SIVs are not so large. Consequently their only alternative to meet debts falling due (if they cannot refinance it) is to sell off assets, and it is the scale of these potential fire-sales that has had such a detrimental impact on ABS valuations. The Moody’s rating agency estimates that SIVs held $400bn of various asset-backed bonds at the beginning of September, and that vehicles without bank sponsors accounted for $90m of this total. While banks in most cases can be expected to provide the additional liquidity necessary to prevent the vehicles they sponsor from having to dispose of large volumes of securities at significant discounts, those set up by hedge funds and others do not have such an “in house” liquidity provider. To say the least, they consequently face an uphill struggle to find an external source of such funding in the current environment. Their situation is exacerbated by their high gearing of the vehicles, which obliges them to maintain mark-tomarket valuations and other triggers that—if breached— can also force them to sell off assets. As the values of assetbacked bonds have plunged, more SIVs have faced enforced asset sales for this reason, and such disposals can only drive market prices further down and spread the malaise to other vehicles.“The problem is that one fund’s forced liquidation depressing prices would be the next fund’s trigger point to liquidate, as net asset values decline,”explains Chris Greener, credit research analyst at Société Générale in London. While no mass sell-offs had taken place by late September, some initial casualties emerged at the end of August. Among the first was the Cheyne Finance SIV, which was established in August 2005 and whose $9.7bn of assets included an unusually heavy exposure to the US sub-prime market through both direct investments and CDOs. <strong>FTSE</strong> GLOBAL MARKETS • NOVEMBER/DECEMBER 2007 While banks in most cases can be expected to provide the additional liquidity necessary to prevent the vehicles they sponsor from having to dispose of large volumes of securities at significant discounts, those set up by hedge funds and others do not have such an “in house” liquidity provider. To say the least, they consequently face an uphill struggle to find an external source of such funding in the current environment. In an announcement to the Irish Stock Exchange on August 28, the Dublin-listed vehicle said that mark-tomarket losses in its investment portfolio had breached one of its key triggers—the major capital loss test—and that it had sold off assets to raise enough cash to meet its projected liabilities for the next few months. Cheyne added that it would “continue to sell assets to meet out liabilities as they come due” while it attempted to negotiate a recapitalisation to extend the maturity of its debt. The same day the €10bn Rhinebridge SIV, sponsored by the troubled IKB Deutsche Industriebank, sold $176m of bonds to meet its immediate debt obligations rather than attempt to draw on liquidity facilities, conceding that further support from IKB and its owners “cannot be expected at this stage”. The impact of these enforced disposals— and the threat of a lot more to come—on bond valuations was savage. By mid- September, the spreads on triple-A residential mortgage-backed securities (RMBS) issued by the big UK master trusts—up to July the tightest priced bonds in the European market—had shot out to 50 basis points on the 3-month Libor benchmark from a level of 11bp just two months before.The secondary market spreads on triple-A bonds on all other asset classes widened by between 175% and 400%, which quickly strangled the primary market. Spain’s Banco Pastor, for example, confirmed on September 20 that it was postponing a planned €600m issue indefinitely until conditions improved, and one banker estimated that at least €20bn of deals out of the country would now be shelved until 2008. The only deals of any size that did emerge in September —like the £5bn Granite 2007-8 issue out of the Northern Rock RMBS master trust that will be used as collateral for the beleaguered bank’s emergency loan facility from the Bank of England—were those that issuers wanted to retain for repo purposes. One or two smaller deals, such as the €750m Sound BV 2 and €250m E-MAC BV issues out of the Netherlands (where in both cases the underlying assets are covered by NHG guarantees) also came out, where the issuers managed to pre-place the senior classes of triple-A notes but were obliged to retain the mezzanine and junior ones. In the secondary market, meanwhile, several of the large repeat issuers began to buy back their own bonds at a substantial discount.“It makes sense for them to do that,” 81
Page 1 and 2: THE NEAR-DEATH experience of Countr
Page 3 and 4: 4-6 December, 2007 Direct Energy Ce
Page 5 and 6: had obtained three financings: firs
Page 7 and 8: THE SECURITIES LENDING Roundtable T
Page 9 and 10: issue, anything that moves is being
Page 11 and 12: MF: That’s a good point. I predic
Page 13 and 14: MF: No idea. It would not have been
Page 15 and 16: interestingly on mark to market. IS
Page 17 and 18: DR: It remains true nonetheless tha
Page 19 and 20: So far, automation has helped back
Page 21 and 22: several hedge funds this summer lef
Page 23 and 24: Interest in 130/30 strategies is se
Page 25 and 26: Today’s markets are growing more
Page 27 and 28: Nevertheless, Taylor says liquidity
Page 29: THE FTSE IWANT THE WORLD INDEX FTSE
Page 33 and 34: While there is confusion over the p
Page 35 and 36: Joseph Cangemi, managing director o
Page 37 and 38: A SNAPSHOT VIEW OF THE SECURITIES L
Page 39 and 40: Table of Capital Returns Index Name
Page 47: Jim wondered if there was an easier

Section 2 - FTSE

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?