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Dublin debt players see opportunity in credit storm Back  
The current turmoil in the global credit markets sparked by defaults in the US sub-prime market is creating opportunity for Dublin based credit investors, who cite the tumult as being a 'healthy correction', while there has been no fall-off in debt products looking to list on the Irish Stock Exchange. They say the recent sell-off in products such as CLOs and leveraged loans is now 'over-done', and with overall fundamentals in the market remaining strong, they are preparing for a busy Q4..
The summer of 2007 has been a tumultuous one for the global credit markets due to the on-going fall-out from the collapse of the US sub-prime market. With spreads continuing to widen, many issuers have pulled their deals, such as the U.K.’s West Bromwich Building Society’s decision to postpone its inaugural ?575 million ($1.1 billion) residential mortgage-backed securitisation, Hawthorn Finance. Moreover, some collateralised loan obligation (CLO) managers are having trouble placing entire CLOs and are instead looking to sell off parts of the deals via total-return swaps.

However, many industry players say that the recent sell-off in products such as CLOs and leveraged loans is now ‘over-done’, and with overall fundamentals in the market remaining strong, they are preparing for a busy Q4.

Dexia Investments Ireland currently manages an ABS portfolio of some €28 billion out of Dublin – and the recent slide in the credit markets hasn’t stopped the firm investing.

‘We’re still buying on an opportunistic and selective basis,’ says Fergal Mcgrath, managing director of the credit spread portfolio at Dexia, adding that those investors who have access to liquidity, don’t have mark-to-market triggers and who are less leveraged, can take advantage of current prices and deals which are priced at the right level will clear’.

He says that the recent crisis is ‘bringing a touch of reality back to the market’, and overall he sees it as being a ‘healthy correction’.

‘It’s very similar to the correction we saw in 1998,’ he says, ‘which was a pure liquidity crisis caused by the Russian crisis and the collapse of Long Term Capital Management’.

‘This is not a credit crunch but more of a liquidity crisis,’ he says, adding that leveraged investors such as hedge funds, conduits and credit funds who are susceptible to daily mark-to-markets, have been forced to reduce leverage. ‘Clearly many investors are feeling some pain right now, and the cost of short-term financing has clearly shot-up, repo haircuts have doubled recently and current bid/offers in the market are clearly out of sync with credit quality’.

However, as long as credit fundamentals remain strong, and stability and clarity returns investors will come back to the market ‘en masse’ come September, he expects spreads on the more robust asset classes to return to more realistic levels. However he believes that we will see a repricing of risk on some asset classes such as CLOs, CMBS and CDOs which will continue to be more vulnerable until the pipeline clears.

Moreover, fears over US sub-prime products may have an adverse impact on UK non-conforming deals and he expects these spreads to stay relatively wide, while he doesn’t expect Spanish RMBS to go back to original levels either, more due to technical reasons.

In July, Dublin based CLO manager, Harbourmaster Capital launched Harbourmaster Pro-Rata CLO 3, a ?600 million CLO of senior leveraged loans, priced via Bank of America.

Like McGrath, Mark Moffat, co-managing director at the firm which has €7 billion in assets under management, says that the current market upheaval is merely a correction. ‘It is great news,’ he says, ‘as the market was getting over-heated in terms of pricing, particularly for US leveraged loans’.

He sees the crisis as offering great buying opportunities, adding that the only downside is that it is becoming more difficult and more expensive to raise to raise capital, and it is taking a bit longer to sell to investors at present.

From a debt listing perspective, it’s ‘business as usual’ says Joanne McEnteggart, director of investment funds & debt securities at NCB Stockbrokers. She says that the firm hasn’t seen any slow-down in the volume of debt products looking to list on the Irish Stock Exchange.

Looking ahead, McGrath expects supply to be huge in Q4. ‘The supply in September was always going to be big, but combined with deals that have been post-poned over the summer, it’s going to be huge,’ he says. However, despite the strong European ABS pipeline for the second half of 2007, according to Standard & Poor’s European ABS Outlook H2 2007, the rating agency expects that some issuances will be delayed until next year.

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