Top Stories
Top Stories

Are notorious asset-backed securities back in favor?

Leslie Shaffer | Writer for
Fuat Kose | E+ | Getty Images

Asset-backed securities (ABS) may have pushed the world into the global financial crisis, but fund managers are beginning to see value in the sector.

"A lot of people have just red-lined the space," Jack Ross, principal at Waterfall Asset Management, said in a panel discussion at the SALT conference in Singapore.

However, he believes that with the right team, it's safe to come back into the sector, while the complexity can put up a barrier to entry for competition.

Waterfall, which has around $2.4 billion in assets under management, focuses on high-yield ABS and loan investments.

(Read more: Mortgage-backed securities are good bet now: Gross)

In the lead up to the global financial crisis, many banks loaded up on subprime mortgage-backed securities which were marketed as AAA-rated, generally viewed as safe. But due to poor lending quality, the underlying loans saw high levels of defaults, taking a huge bite out of the securities' value. The size and scope of the losses roiled the global financial system.

The ABS industry isn't just about sub-prime mortgages, he noted. There have been more than 60 sectors that have had securitized loans since the mid-1980s, with a wide variety of asset types, he said.

Mortgage-Backed Securities: CNBC Explains

Moves by banks globally to deleverage their balance sheets mean that some of the securities now up for sale haven't seen light in the market for over 10 years, Ross said.

"There's typically been downgrades and there's not much price discovery," Ross said, noting investing in these assets, which have a variety of structures, lending types and vary widely by geography, requires a great deal of research.

(Read more: Mortgage-backed securities to 'reemerge?')

But he added, "often times, seasoning is your friend. The worst borrowers have already defaulted" in the crisis days. The rest, he said, are likely to continue making payments.

Others on the panel also see value in the segment.

The spreads on many student and auto loan ABS are back to pre-crisis levels, noted Andrew Peisch, head of business development at Seer Capital Management, which specializes is securitized credit, mostly in the residential and commercial mortgage segment.

"A lot of those transactions retained their AAA ratings post-crisis," Peisch said.

(Read more: Subprime is back: Will this end badly?)

Related Tags