Master Trusts Live?This might at first sight look expensive for Barclays, but a bit more analysis suggests that the bank is assisting its Gracechurch master trust. I just read a good research piece by Merrill on master trusts, which reminds us that extension risk is a big concern. Showing that refinancing is possible will directly help Gracechurch, and indirectly help Barclays and any other banks which have an overhang of RMBS, by calming the market.
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An interesting article in the FT this week ("Disclose the fair value of complex securities") written by a bunch of academics, including one Robert Merton, who on the one hand is a Nobel prizewinner, and on the other has his name written all over the debacle which was Long Term Capital Management, which almost brought down the financial system in the 1990s.
The premiss [sic] seems to be that markets are efficient. This 'picking up nickels in front of bulldozers' approach proved disastrous in the case of LTCM, and even more so in the last 2 years.
'Fair Value' is an emotive term-implicitly, any other price is 'unfair'. What is really meant is 'market price', which is often in and of itself a function of emotion rather than logic. I have recently been putting together a portfolio of high-quality AAA assets with an IRR of 20%. Is that 'fair value'? Maybe not 'fair' to the academics, but it's a rattling good deal!
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Barclay's Capital has been in the press recently with something called "smart securitisation". This is presumably to distinguish it from "dumb securitisation". Was that what BarCap was doing over the years?
Goldman has apparently been doing something similar to "smart securitisation". So what is it?
It looks as though it's driven by Basel II considerations. Regulators and others may go on about real equity in the form of ordinary shares being the desirable form of Tier I capital, but regulatory capital is still the key measure.
So the deal seems to be that you write off the bottom 20% or so; sell on the next 20 or 30% to an external investor; and keep the top bit in a rated form, thereby using less capital. “It’s not securitisation for leverage and arbitrage purposes any more" says the man from BarCap. Oh yes it is! The game is to transfer risk from regulated to non-regulated entities. Arbitrage of Basel II using securitisation is built into the system, as I wrote in an article the first version of which was penned in early 2007. (You can find this article, "Securitisation Still Works! on http://www.robinhoodfinance.com/articles.html)
One question is : who are the buyers? The IFR mentions "asset managers, private equity firms and hedge funds". I know of several operations trying to get such investors to make a start with basic underpriced AAAs, with IRRs well into double figures, and they are not having an easy time getting signatures on cheques, so I wonder how deep this market really is.
Perfectly good AAA paper has been selling at 70 or so for some time now-BarCap itself recently tendered just this price to buy back AAA bonds it had issued. I'd take a look at buying bonds in the market, and applying a modest level of gearing myself (back-to-back with a bank and its central bank?) to replicate this structure with me as investor in the driving seat, rather than buying pre-packaged stuff from investment banks. Caveat emptor.
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From today's FT highlights email:
"Investment banking league table
See how the world's leading investment banks are fearing"
It looks as though the fear inadvertently referred to by the FT still has considerable hold in some sectors.
The figures show that M&A is still a shadow of its boom years self. Investment grade loans are running at half 2007 levels, leveraged loans less than that, and highly leveraged loans have dropped off the radar. Equities are showing some resilience, with more firms showing an increase than a decrease in net revenue.
Corporate bonds are up: European nonfinancial companies outside the U.K. have raised some $318 billion from the bond markets, up 45% from the whole of 2008 and more than any entire year on record (per Dealogic)
Although structured finance is a shadow of its former self, two factors will very likely cause a renaissance in the medium term:
-Many major banks are now rated lower than the corporate customers which are issuing bonds in such numbers;
-Banks are not lending to smaller and medium-sized companies. These companies can't generally issue bonds, but they can issue rated instruments via structured finance.
There will be a time lag whilst the market wakes up to the ridiculous undervaluation of some ABS and buys for value. Once this anomaly has gone, the market will pick up again, with investors looking for solid assets with a clear story and a good rating, i.e. the likes of trade receivables rather than US Sub-Prime or the ludicrous CPDOs.
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The first answer has to be "when it's an Icelandic bank". In early 2007, only a couple of years ago, Moody's had a brainstorm and rated all Icelandic banks Aaa. Fortis too, come to that. All gone now, in any recognisable form. So much for long-term ratings. And another illustation of the folly of relying blindly on the output of rating agencies.
I've recently been looking into the reliability and stability of ratings for an ABS fund. (This is of course based on the fact that some ABS is ludicrously underpriced-but we have to avoid the dogs!). Fitch has produced some useful research in the last couple of months.
There are interesting conclusions regarding 2008.
-98% of all RMBS downgrades were in the US; but we're not looking there
-99.8% of European prime RMBS AAAs remained AAA.0.2% was downgraded to AA. No downgrades below this
-Only 50.9% of US Alt-A AAAs remained AAA. A massive 36.4% went to sub-investment grade
In European CMBS, 98.9% of AAAs remained AAA, 1.1% went down only to AA.
Remember, these were all AAA 12 months earlier. The obvious conclusions are
-Not all AAAs are going to stay that way
-Some sectors look pretty solid and, subject to some professional credit, modelling and monitoring work, there are good profits to be made.
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