When a big institutional investor like Mitsubishi Corporation buys a 19.5 per cent stake in a firm dedicated to fixed-income hedge funds and structured debt vehicles, and stumps up a further $300m (€194.4m) to seed its new investment strategies, it starts to look like big names are calling the bottom of the credit markets.
That was the deal announced at the beginning of May by Stamford, CT-based Aladdin Capital Management, which manages $17.5bn. Where is that $300m seed money going? The bulk of it is headed for the newly-launched Aladdin Opportunity Fund, which is setting out to profit from knock-down value across asset-backed securities (ABS) markets.
“We feel our partnership with Aladdin will provide us with an ideal platform to capitalize on the numerous opportunities created by recent dislocations in the market,” says Hideshi Takeuchi, Mitsubishi’s group COO for industrial finance, logistics & development.
“The only country that was not harmed by the ABS trouble was Japan,” observes CEO Aminkhan Aladin. “If we look back two years from now, we are going to see this as a period of great opportunity. But right now we are talking to clients, and they say, ‘Well, I’ve been hurt before in this market.’ There will continue to be aftershocks, but we have to convince investors that it is getting close to the right time.”
It will help that Aladdin Capital is not alone in picking up the signals.
Jeffrey Gundlach, CIO with TCW Group, conceded that “the feel-good chorus might at last be singing on key” in a commentary published in May, after consistently warning against calling the bottom of the market last August, October and November.
“The margin-call liquidations of February-March offered up merchandise at extraordinary discounts,” he wrote. “For example, we found Alt-A and prime mortgage-backed bonds priced to yield 10 per cent or more even assuming pool default rates of greater than 50 per cent and recoveries of less than 40 per cent from foreclosure sales.”
In Europe, $11bn ABS and leveraged loan specialist Cairn Capital launched its Cairn Capital Structured Credit Fund with locked-up seed capital “to capitalize on current dislocations and opportunities across the spectrum of structured credit”; and Felix Blomenkamp, head of European ABS at Pimco, announced in June that he was bolstering his team as widened spreads promise “attractive returns on a risk-adjusted basis for years to come.”
Approach with caution
“There’s been a significant rally already, but if anyone can afford to lock 10 per cent of their portfolio away for a few years in good-quality European structured products then it’s a good place to be right now,” agrees Jim Irvine, head of structured products, Henderson Global Investors. “We are currently speaking to selected institutional clients regarding opportunities in that market that we believe may provide attractive returns over the medium term. These discussions will inform our decision regarding structure and timing of any potential fund we offer in that space.
“The trick right now is to seek out those investors who either haven’t been burned before. We believe that pension funds both in the UK and Europe have been under-exposed and we expect to see more commitment from them in time.”
So what has changed? There were buyers back in February and March – TCW and other big players were investing “aggressively”, as Mr Gundlach points out - but not enough to replace the hundreds of billions of SIV (structured investment vehicles) and conduit demand that pulled out last year: it took the Fed flinging open its Discount Window (lending three-times as much in the space of a week in April as it did through the whole of 2006), the ECB taking on €300bn of ABS collateral and the Bank of England £50bn to do the trick.
The fact that the ownership has changed, away from the leveraged banks, hedge funds, real estate investment trusts, collateralised debt obligations (CDOs) and SIVs, perhaps mitigates against further forced liquidations; as does the fact that several SIVs are still edging towards successful refinancing. With central banks suddenly becoming the biggest buyers of residential mortgage-backed securities (RMBS), spreads immediately narrowed: over one week synthetic UK Prime AAA RMBS spreads tightened 70 basis points to Libor+100 basis points and Dutch Prime AAA RMBS by 40 basis points to Libor+70 basis points.
But those levels are still wide by historical norms, and especially compared to the Libor+5 basis points extremes seen before the fallout last year, despite having seen significant recovery. Any more downgrade-driven impairments could still trigger events of default, and the fundamentals in the US still look pretty nasty: as Mr Gundlach points out, there is $3000bn outstanding in US non-agency MBS, and he estimates that if they were all written-off at mark-to-market prices today losses would pile up at around $1000bn – 7 per cent of US GDP.
