Asset-Backed Debt Gets Riskier As Crisis Eases: Moody’s

Posted on March 21, 2012 by victor.hatley

Asset-Backed debt, like car loans, student loans, and credit cards, is becoming increasingly riskier as the banking crisis eases it’s hold on the global economy, according to Moody’s. This is due in part to the loosening of the underwriting standards, structures becoming more intricate, and untested market participants.

Underwriting Requirements Easing Off

With the underwriting standards being backed off in areas such as auto loans, and other riskier ventures, the credit rating companies need to pay heed to the standards, and start assigning appropriate rating levels to these bonds. For the weaker securities, there should be features to offset the risks before the much sought after triple A rating can be assigned to the bonds in question.

Claire Robinson, the new-issue structured finance ratings head at Moody’s, and author of the report that was published, said that “We want to make sure that the credit protections that investors have keep pace with the evolution of the market.” She went on to explain that the loosening of the standards is a natural reaction to the recovery from the credit crisis, but as the credit eases, investor protections must be protected.

Credit Easing Off – But High Ratings Still Prevail

If the nature of the cycle is realized, then the credit easing will keep going on into 2012. And while originators are easing the requirements, areas like the sub-prime auto loan secularization are steadily returning to pre-recession normal levels. Loan pools backing up auto ABS are bound to start seeing more losses. But investors can offset these with the standard methods of credit enhancements, and buffers.

In spite of the ongoing recovery and Congressional scrutiny, Moody’s competitors are still issuing unwarranted AAA’s. One sub-prime transaction issued by Exeter Finance Corp received higher ratings than Moody’s would have given it…and even these high ratings didn’t agree with each other. The S&P rated the deal at AA, while DBRS rated it at AAA. On Feb 23rd the deal priced at $200 million. All the while Moody’s claimed that, “The resulting potential for volatility in asset performance makes high invest-grade ratings inappropriate.”

Other Bad Ratings – According To Moody’s

But that wasn’t the only credit ratings that were issued recently that Moody’s considers flawed. Credit card bonds sponsored by senior issuers like World Financial Network, Cabela’s, and 1st Financial wouldn’t deserve the AAA rating. Also on the list was the entry of hedge funds, investment banks, and private equity funds into the sub-prime mortgage and auto business is a large red flag.

The Good News

The good news is that the year-to-date volume is up by approximately $15 billion to $45 from the 2011 figure of about $30 billion. This puts the market on a course to complete the year over lasts years final of $125 billion. Also, at least 4 deals were up-sized this last week because of demand or over-subscriptions, and there was larger than expected bid lists, increasing trading in the secondary markets. If investors are careful, then trends are suggesting that the ABS market is set for stronger growth…the first growth of the ABS market since the onset of the crisis.

Let us know what you are thinking about these late developments. Send us a tweet to: @managedaccts.

The Greek Bailout – Two Sides Of The Coin

Posted on March 18, 2012 by victor.hatley

Last Thursday the International Monetary Fund (IMF) and the European Union (EU) announced a Greek bailout, a $171 billion affair that the IMF claimed Greece had earned in the last months by their attempts to skirt full blown bankruptcy. The investors were standing to lose more than $130 billion from the debt swap that had been initiated to ease off the public sector burdens.

Interview With The BOG Governor

With €50 billion set aside by the EU and IMF for the refunding of the banks, the Bank Of Greece’s governor, George Provopoulos said in an interview Saturday that “I believe that the available amount will not need to be fully exhausted,” then continued with “The recapitalization of the banks will be completed by September 2012.” He did state though that he expected that there would be mergers taking place in spite of the Alpha Bank’s planned shareholder meeting to discuss scrapping their merger with EFG Eurobank Ergasias, one of the largest Greek bank mergers in years.

Investors Worried Anyways

The governor is set to testify Monday at the Bank of Greece’s monetary report to discuss the banking system, the economic recovery, and the difficulties that they face in the near and mid-term future…a subject still considered up for debate. The IMF warned that the bailout would have to be managed very carefully and that it left little room for error, and that Greece was still “accident prone.” A sentiment that many investors are seemingly echoing. In the report released on Friday, the IMF staff wrote that the package relies on very ambitious privatization and fiscal goals. But, mainly n the bringing new life to the structural reforms. If policies fail, or fail to be implemented, then a second bail out could become necessary.

May Take Second Bailout

This is that part that has investors concerned. Investors worry that the bailout may not be enough, in spite of the governors statement. Investors worry that if the Greek plan goes off track that the EU may have to backstop the country’s liquidity while coming up with another plan to boost the Greek economy. As it stands now, they had to agree to massive further spending cuts in order to obtain the loans. The plan also calls for a move to private industry, away from the public enterprise, in order to make the economy more competitive globally.

Separately Managed Accounts

Posted on January 19, 2012 by Oscar Omoro

These accounts are included in the same family of investment products as Unified Managed Accounts, Diversified Managed Accounts, and Multiple Style Portfolios and Managed Accounts. The salient features of separately managed accounts include:

Securities and other assets managed by a professional money manager.

The manager makes all investment decisions regarding the particular securities or assets.

The client may fire the manager at any time.

The account manager is compensated for services rendered.

Some of these accounts have more than one trader. In currency trading, there are three major sessions throughout any 24 hour trading period. Traders will “hand off” trades to the next manager as the clock moves.

Key Decisions

A key factor in opening a separately managed account regards your own risk tolerance. You should discuss this with your account manager before investing. Risk tolerance essentially involves the degree of risk you are willing to accept, while taking into account such factors as your age, income level and financial objectives. These are all key factors in formulating your investment philosophy. Obviously, investors with longer time horizons can usually afford to assume greater short-term risks in exchange for potentially greater long-term returns.

We feel that managed accounts list seven important advantages to investors:

1. Diversification from traditional asset classes.

2. Strong historical returns, measured by published track records.

3. Professional money managers.

4. Competitive fees.

5. Funds are held in your name, at your broker.

6. Relief from the stress of self-trading.

7. Transparency.

With this said, you should always consult a trusted advisor before making any investment decisions in managed accounts.

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