Distressed ABS: Ugly is as good as it gets
Appetite for distressed ABS is not nearly sufficient to mop up supply.
It is now a year since the jitters in US sub-prime turned into an earthquake that engulfed the securitization market. Asset valuations have been falling pretty much consistently ever since. If ever there was a distressed buyers’ opportunity, the ABS market is it – it is hard to argue that a triple-A rated security trading at a double-digit discount to par is anything other than a screaming buy.
But buyers remain extremely nervous about stepping in. This is partly because of a lingering concern that the market could take another lurch downwards on more bad news. Yes, the downgrade of MBIA to single-A would have been unthinkable even six months ago and it is hard to imagine that the impact will be negligible but it is hard to see how some bonds could be priced any lower. What bids there are for many mortgage assets are valuing bonds on an interest-only basis – assuming that cashflows will be zero. It is hard to be much more bearish than that – so why aren’t buyers piling in?
Some are, but the problem is that the volume of assets needing to be sold is so great that supply is simply overwhelming demand – with obvious implications for spreads.