|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
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,
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
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
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
"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
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
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."
ABS East: Is the RMBS trade over? |
ABS East: CLOs heat up