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Return of exotic secutization?

By Ken Jarboe on April 5, 2011 12:02 PM

From the WSJ Real Time Economics blog Appetite Grows for Exotic Asset-Backed
Securities. The article mentions that securities backed by assets such as timber harvests,
timeshare revenue and cellphone-tower leases are offering higher yields that auto or
student loan backed securities. It does not mention IP backed securities however. But if
the market is now interested in timber harvests, it might be receptive to IP as well.

Appetite Grows for Exotic Asset-Backed Securities

The hunger for exotic asset-backed securities is growing, even as the broader market for the
investments continues to shrink.

The securities are backed by student, auto and credit-card loans, and new issuance has
fallen every year for five straight years, shrinking by some 81% over that period. Some
$25.17 billion worth of asset-backed bonds were sold this year though March, according to
data from Citigroup Inc.

That’s down from $31.54 billion over the same period last year. This doesn’t include bonds
backed by mortgages for homes or shopping malls, office complexes and hotels.

Industry participants expect a pickup later this year with increased sales of more exotic,
higher-yielding issues, such as those backed by timber harvests, timeshare revenue and
cellphone-tower leases. By Thursday, such “off-the-run” bonds valued at $1.89 billion were
priced, according to Citigroup data. That’s a fraction of the $16.18 billion of auto-sector
bonds sold so far this year.

Even though they comprise a smaller portion of the market and are considered riskier,
investors like money managers, insurance companies and hedge funds buy them because
they yield more than auto or student loan-backed bonds.

Off-the-run issues are generally smaller and more complicated to structure than the more
mainstream bonds. Yet yields are in the 5% to 6% range, higher than the 3% yields found in
the auto- and student-loan sectors.

On March 17, Wyndham Worldwide Corp. sold a $400 million timeshare receivables-backed
deal. Richland Towers also sold a $188 million multi-use broadcast tower bond last month.
They are priced to yield between 4% and 5%, and these “aggressive” yields have “driven
investor interest,” said Jay Steiner, managing director and co-head of the credit solutions
group at Deutsche Bank.

More than two dozen buyers bought these deals, he said, noting that this was about four
times higher than was usual last year. “The bulk of the buyers have been fund investors,
with a broad range of money managers, and for longer-dated assets, insurance companies.”
That’s because the insurance companies are what are referred to as “buy-and-hold”
investors, who can keep these assets for their duration of three to six years with ease.
The Federal Reserve propped up the asset-backed securities market during the financial
crisis through a program called the Term Asset-Backed Securities Loan Facility, or TALF.
The $200 billion program, which lasted from March 2009 until June 2010, provided low-cost
loans to investors buying nonmortgage asset-backed securities after the market dried up.

At its peak, about $700 billion of securities backed by auto and student loans and credit card
debt were sold. Issuance withered to about $135 billion in 2010, according to data from
Asset-Backed Alert, a trade publication. Estimates for this year’s issuance are in the same

Traditionally, insurance companies, pension funds and money managers bought asset-
backed deals to diversify their portfolios. During the credit crunch, many became ultra-
cautious about these bonds. The TALF program attracted hedge funds and a broader range
of money managers to buy asset-backed securities–or bought more than they had

New investors in the structured-finance market were “attracted by the levered returns and
gained familiarity with different assets,” said Deutsche Bank’s Steiner.

“We saw an opportunity in TALF, and it was attractive for our investor base, which is almost
exclusively Korean institutions,” said Simina Farcasiu, chief investment officer of Belstar
Group, a private investment firm that used $2.98 billion of TALF money to buy ABS, the first
time it purchased these bonds.

For conventional ABS bonds, though, the breadth of the investor base “has recovered to
precrisis levels,” said Brian Wiele, head of Americas securitization syndicate at Barclays
Capital. Issuance has been steady this year, he said, adding that he expects that to continue
as the economy picks up.