By: Daniel Wohlberg and Sean Solis
On Sunday, September 21st through Tuesday, September 23rd, almost 3,500 industry insiders descended upon Miami Beach for the 20th annual ABS East Conference at the acclaimed Fontainebleau Hotel. The enthusiasm and excitement was palpable considering the record setting year the market had so far, especially in the CLO space. The general tenor was cautious optimism as many believe the roaring market would continue for the next few years, but saving a bit of hesitation for some of the regulatory pitfalls up ahead. Most were comfortable, however, considering the market’s resilience in dealing with the recent implementation of the Volcker Rule.
Despite the rain occasionally dampening some of the attendees’ attire, all of the panels and seminars were extremely well attended and offered insightful and entertaining commentary on the state of the industry. ABS panels covered a wide variety of important evolving issues such as the implementation of the Common Securitization Platform, the role of the Consumer Finance Protection Bureau in the ABS markets (including discussions on the qualified mortgage rules), and the effects that the disclosure and reporting requirements in the newly adopted Regulation AB II will have on general offering procedures and shelf registration programs. Dechert was also represented on panels at ABS East with Patrick Dolan providing the crowd with his expert insight into PACE Financing and I (Sean Solis) moderating a spirited panel on how some of the top industry professionals choose and evaluate CLO managers.
Though the conference spanned the gamut on a wide variety of issues, a few trends did emerge throughout panel discussions and conversations over drinks:
(1) Peer-to-peer lending and crowdfunding securitization opportunities were hot topics garnering almost a full day of panels on the last day of the conference. Many in the industry see these types of financings as a new area for securitizers to get involved. If you’re interested, John Timperio and Mary Bear authored a recent Law360 article on some of the issues one might encounter in peer-to-peer lending securizations.
(2) Investor-led panels were standing room only as much of the interested parties (be it law firms, banks and/or managers) were eager to hear what investors saw as the best opportunities on the horizon. Both equity and AAA debt buyers showed incredible optimism and satisfaction with the current returns and future projections. Though many see spreads tightening as the year comes to close, most thought a sweet spot would be found by the beginning of 2015. Of particular interest was the agreement among investors up and down the stack that the most important issue in choosing what deals to invest in was more the quality of the professionals involved and less the track record of the manager itself signaling some opportunities for newer managers that employ industry professionals with successful track records elsewhere. This is a positive sign considering the large amount of new managers that have popped up over the last year or two.
(3) U.S. risk retention remains a big unknown variable for the industry. Final risk retention rules will likely be issued by the end of October. Some panelists predicted that the regulators would provide some relief in the form of an ability to source third party equity or allow deals to comply with a “qualified CLO exemption” instead of holding five percent of the entire deal. Many shrugged their shoulders with a sigh hoping that the regulators will provide an outlet to avoid a large contraction in some of the smaller managers should the retention requirements become a bar for them in the industry. How the risk retention rules affect the market will be one of the major trends that we will be following this year.
(4) The refinancing window of opportunity for a lot of the early 2.0 deals coming out of their non-call periods seems to be slowing. This is of particular importance as AAA holders continue to put the pressure on non-Volcker compliant deals to be amended since many managers were packaging the refinancing amendments and Volcker amendments together in order to satisfy the equity buyers who were not as inclined to make the Volcker specific changes. However, many attendees seemed to believe that such a window might re-open again in the first quarter of 2015.
(5) Rating agencies were also represented and provided great insight into their ratings criteria and their thoughts for the future. S&P was specifically vocal about the recent updates to its criteria providing greater flexibility for deal managers.
As we settle back into a busy pipeline for Q4 2014 after the return from beautiful Miami Beach, we will be able to better judge this year’s prognostications. If those attending ABS East are right, 2015 will be another exciting and challenging year for our industry.