Securitization: Distressed asset buyer beware
Despite a new round of fundraising for distressed ABS, a market floor is not necessarily in sight.
One year ago, when the depth and breadth of the crisis in the US sub-prime mortgage market was first coming to light, a move into distressed ABS investing seemed like a prescient and nimble decision. Twelve months later and those early adopters are licking their wounds, burnt by prices that stubbornly refuse to stop falling.
Recent news that Pimco is now looking to raise a further $5 billion to invest in distressed non-agency RMBS and CMBS comes amid market estimates that $275 billion had been raised in distressed funds by the first quarter of this year, and $35 billion has been raised by hedge funds specifically to invest in distressed MBS. One could be forgiven for thinking that the market has decided the end is in sight.
Is it? The way that all markets heal themselves is by allowing prices to fall to the point at which they become absurdly cheap and then buyers are lured back in. But it is far from clear that the ABS market has reached that point.
The closest the market has come to establishing some sort of clearing price for distressed ABS is the recent liquidation of Cheyne Finance’s defunct structured investment vehicle.