Yachts, oysters and asset backed cheerleading adorned a decidedly sunny ABS East conference on South Beach

By Lawrence Delevingne

Wed Oct 24, 2012

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A resurrected John Devaney took the stage, while Lew Ranieri urged caution.

John Devaney's 125-foot yacht, the "Dorothy Ann" (named after his mother) docked across the street from the ABS East 2012 conference at the Fontainebleau Miami Beach.

It felt a lot like 2006 at the ABS East conference in Miami this week.

Onetime superstar trader John Devaney of United Capital Markets moderated a panel discussion on the housing market, his 125-foot yacht "Dorothy Ann" anchored across the street. Lead sponsor Morgan Stanley's party for investors at South Beach hotspot Soho Beach House featured tables overflowing with lobster tail and oysters. And for three days during panel discussions at the posh Fontainebleau hotel, bankers, analysts and investors used phrases like "great, great opportunity," "room to run" and "extremely strong" to describe the resurgent market for asset backed securities.

"There's very, very good momentum--I think it's going to continue," said Devaney of the housing market speaking onstage in the conference halls' main ballroom. Barring a U.S. debt default or some other calamity, he said, home prices should rise about 6% in the next twelve months as more consumers enter the home market.

How times have changed. In 2009, Time Magazine named Devaney one of the "25 People to Blame for the Financial Crisis" after his subprime MBS hedge funds blew up and he was forced to sell his helicopter, jet and first boat, "Positive Carry." In those days, post financial crisis amid a moribund ABS market, many ABS East attendees came as much to hand out resumes as to do deals. The mood, in short, was dour.

This year, Devaney is again profiting from mortgage trading as investors fixate on ABS. Hedge funds and other allocator attendance increased to about 475 this year from 270 last year out of about 2,700 people overall. Hedge fund firms sending analysts included Elliott Management, Fortress Investment Group, GoldenTree Asset Management, Paulson & Co., King Street Capital Management, Pine River Capital Management, Third Point and many others.

Indeed, seemingly insatiable demand for yield has driven hedge fund and other investors towards ABS this year. Banks have only been too happy to produce it, turning out $162 billion in various types of securities already this year, compared with $124 billion in all of 2011, according to a recent Bank of America Merrill Lynch report.

Arguably the best trade for hedge funds in the ABS market has been residential mortgage backed securities, particularly in subprime bonds. Many firms, including  Pine River, Metacapital Management, Axonic Capital and Cerberus, have registered industry leading double digit returns. The average manager in the strategy is up 11.42% for the year through September, according to the Absolute Return MBS Index, compared to a 4.96% composite return across strategies.

Opinions were mixed on whether those gains would continue. "The RMBS market is way overheated. Tons of money has flowed into hedge funds trading these securities and that's been a big reason prices have gone up so much," said Tom Capasse, co-founder and principal of $2 billion Waterfall Asset Management, whose structured credit Eden fund is up 17.46% through September. "The RMBS market is now highly correlated with equities and vulnerable to a sharp reversal with the overhanging macro risks, such as Europe. We look at relative value across all structured credit sectors and have been avoiding residential credit in favor of CLO [collateralized loan obligations], CRE [commercial real estate], non-performing loans and esoteric ABS."

Plenty were positive. "I'm generically still very bullish on the market," said David Kaplan, director of RMBS trading at investment bank Gleacher & Company. "The sector still has room to run." Kaplan, who focuses on prime RMBS, said he anticipates housing prices will increase between 5% and 10% in the next year.

Rivaling and perhaps exceeding mortgage attention at the conference was the resurgence of CLOs. The market stalled after the financial crisis hit, with issuance virtually dead in 2009 and 2010. But the market has raced back this year, with $35 billion in CLOs being issued, according to Securitization Intelligence. Some of the new securities in 2012 have come from firms known for their hedge funds: Och-Ziff Capital Management, Onex Credit Partners and Highbridge Capital Management.

"Some investors are reflexively scared of CLOs because of the financial crisis, but most actually performed as they were set up to and did not blow up. That fear is actually good for us managers because the space is not overheated yet, particularly with the equity and mezzanine portions of deals," said Serhan Secmen, the manager of the soon-to launch CLO Investments Fund at Citi Capital Advisors and one of the many investors to speak positively of the sector.

Secmen manages about $255 million in CLO investments in various CCA vehicles including a managed account that is up about 42% for the year through October 15, according to a person familiar with the performance. "The returns have been great for CLOs and should continue to be. It's one of the best trades out there with relative yields so low," he said. (An expanded discussion of CLOs at ABS East here).

Other ABS pitched on various panels included auto ABS, which at $84.8 billion represents 55.5% of all issuance this year, according to Securitization Intelligence (credit card ABS was 20%, student loans 10.6%, esoteric ABS 7.2% and equipment 6.7%).

"The reality is there just aren't a lot of asset classes left that earn any kind of real spread...and structured products have done very, very well," said Harris Trifon, co-head of U.S. ABS research at Deutsche Bank. Trifon said many ABS products like subprime auto loans and shipping containers will continue to outperform. "It's very difficult, barring some catalyst like fiscal cliff or event in the Middle East, to see how this derails in the foreseeable future," he said.

Despite the largely positive tone of the conference, there were stern warnings to the crowd. "Our rule should be that we strive to ensure that all defaults are due to life events, not due to defects and weakness in the loan manufacturing process,"  said Lew Ranieri, president of real estate investment firm Ranieri Partners and known as the father of the securitization market. "Are you that guy?" he asked of the bankers in the room looking to drive the market back with more loans.

Regardless, Ranieri was happy his industry is coming back. "Its good to be at the conference this year," he said. "Everyone feels like there's real vitality."

See also: ABS East: Is the RMBS trade over? | ABS East: CLOs heat up

ISSN: 2151-1845 / CDC10004H

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