The opacity of securitization structures in the run up to the financial crisis was one of the chief reasons the asset class was vilified in its aftermath, and investors today are calling for higher levels of disclosure.
DealVector, which bills itself as a social network for bondholders, is a firm believer in technology’s ability to dismantle the information asymmetries that persist in the bond markets.
“One of the reasons we have been so successful is that people are now accustomed to conducting almost all of their business on the cloud,” Dave Jefferds, co-founder of DealVector, told GlobalCapital at ABS Vegas on Monday. “That was not the case five years ago.”
Middle ground
But as discussions at the conference this week have already proved, the market is still struggling to find the equilibrium between sell-side and buy-side interests.
One of the biggest problems is that within the issuer and investor groups there are subsets with very differing interests. Senior and subordinate investors are often looking for completely different data sets, said Pia McCusker, managing director at State Street Global Advisors, during a panel discussion at ABS Vegas.
McCusker, who typically focuses on shorter tenor triple-A paper, said that loan level data was of limited value to those buying towards the top of the stack and getting paid off in a matter of months.
‘Secret sauce’
At the same time, the costs involved with greater disclosure are a much bigger consideration for smaller ABS issuers than larger players such as GE, whose head of investor development Steven Day weighed in on issuers’ reluctance to divulge more information on their loan books.
“At some point too much detailed information such as loan level data can actually be counter-effective as it raises questions that we may not be able to adequately clarify in a public manner,” he said.
“There is always going to be a certain level of secret sauce in originator expertise that is involved in the composition of the assets in the pool. That is what makes us successful and that is our value proposition as a business.”
Antiquated norms
But with new players such as peer-to-peer and marketplace lenders rapidly changing the game with their levels of disclosure, the relative opacity of more established ABS players’ methods is looking increasingly antiquated.
“The purpose of transparency is to improve liquidity,” argued John Calabrese, managing director at Guggenheim Securities, who moderated the panel. “I find in trading legacy distressed positions and just sourcing the data necessary to do the deal, the process of the transference of that information… is broken and has been for a long time.
“One of the best things we can do… is allow the sharing of that information to occur between parties. Currently if you don’t own it you’re not getting the information and that’s the end of it. Something to that effect needs to be addressed.”
Investors not satisfied
Before the crisis, transparency was not so much of an issue, as the track record of ABS asset classes was perceived to be excellent. That is obviously no longer the case, said Michele Olds, who manages the master servicing division at Nationstar Mortgage.
“I can tell you that investors are asking a lot of questions and in my opinion they are not satisfied with what they are getting,” said Olds.
“We get a lot of questions that we simply can’t answer because we have to refer the request to the trustee. There are times when I will provide information to the trustee on the question but if there are other servicers working on the deal and the requirement is for those servicers to provide that information, then the investor can’t get that information.”
‘Deal agents’
Some market participants have more recently been discussing the introduction of a ‘deal agent’ role to be taken by an independent third party, sitting between issuers and investors and representing investor interests.
Panellist John Barrett, a portfolio manager at The Palisades Group, said he had been approached by a number of investors from across the credit stack about the issue.
Olds said this ‘deal agent’ role was what master servicers used to do, but that agreements in place on legacy deals gave the master servicer limited power to act if problem loans were identified.
Facebook generation
Some originators argue there are security issues with divulging such granular and often personal information about borrowers to the investment community. But Guggenheim’s Calabrese gave that idea short shrift.
“We are living in an age where most people give up their entire personal life on the internet,” he said.
“Perhaps the regulatory environment that is trying to protect that same populus is a little bit behind the times at the moment with how open people are currently willing to be with their information.
“We all know that the information is helpful and the more granular it is the better it is to make investment decisions. If the borrowers are willing to give up the information then who are we really trying to protect here?”