PARADISE ISLAND, Bahamas – While the franchise-loan sector of the ABS market is not yet dead, it is in critical condition, researchers noted at the Information Management Network ABS East conference last week. While franchise loan origination has certainly not ceased, and franchise loan pools trade in the whole loan market, the “execution is not efficient for ABS,” noted Morgan Stanley’s Chip Schorin, speaking Wednesday on the ABS researcher roundtable.
JPMorgan Securities’ research head Chris Flanagan agreed, adding, “This is not a sector we care about going forward, except for cleaning up the current mess.”
Flanagan said that the only value currently found in outstanding franchise ABS paper is for those looking to purchase at a significant discount and, with a lot of breakup analysis, realize gains. “If you can find some way to pay $0.15 on the dollar, get your money back in six months and get out faster than anyone else, there is some value in franchise ABS.”
Flanagan added that while the business model of Franchise Mortgage Acceptance Corp. (FMAC) “is somewhat solid” the current legal troubles surrounding Enterprise Mortgage Acceptance Corp. (EMAC) and the vague language used in court documents, as reported by the ASR, show that getting involved is not worth the effort.
Also a contributing factor is the growing investor demand for vanilla ABS collateral, evidenced by the continually increasing supply in auto loan, credit card and home equity ABS. The fact that these components dominate the ABS landscape and the shrinking of the “other” sector compared to the entire market “is not by accident,” panelists commented.
