Fear and Loathing of Asset-Backed Securities? Get Over It!
The role that asset-backed securities (ABS), such as mortgages, played in the recent financial meltdown led both investors and issuers to shun entire classes of securitized investments. For instance, the value of U.S. credit card-backed ABS plummeted from $402 billion in 2003 to $206 billion in 2010, according to the Securities Industry and Financial Markets Association (SIFMA). “At one time, the securitization market provided trillions of dollars of liquidity to virtually every sector of the economy. However, during the financial crisis, ABS investors suffered significant losses, causing the market for securitization to rapidly decline,” said Securities and Exchange Commission Chairman Mary Schapiro in a January 2011 statement on new rules designed to foster better disclosure by issuers of asset-backed securities (ABS).
Clearly, some asset-backed securities played a significant role in the crisis. However, “not all ABS are alike,” notes Lance Pan, director of investment research with Capital Advisors, in a recent research paper, available here. Some sectors, in particular, AAA-rated credit card-backed securities, can be a worthwhile investment option for corporate treasurers, Pan adds.
To start, Pan notes that credit card ABS account for a small portion of the overall ABS market â€“ an average of about 13 percent over the past five years, according to SIFMA data. In addition, and unlike other sectors the market, statistics on consumer credit delinquencies are readily available, providing investors with a means of monitoring the quality of their investments. In addition, credit-card backed securities generally mature within about three years. The relatively short maturities also help contain risk. What’s more, credit card delinquencies and charge-offs have begun moderating since mid-2009.
Along with the risk profile of credit card investments, return also is key, of course. Pan’s analysis shows that over the 2000-2010 time frame, the annualized return from credit card ABS topped that of corporate bonds; the cards returned 6.73 percent to the bonds’ 6.25 percent.
While the past few years have been tumultuous for all asset-backed securities, the time appears right for corporate treasurers to revisit this sector of the market.
By Karen Kroll