Investors seek out equity tranches

In their search for yield, specialist asset-backed securities (ABS) investors are increasingly turning to equity tranches of securitised bonds issued by corporates and banks. Equity tranches are the first-loss pieces of securitisation transactions, and the specialists say accounting and regulatory changes will prompt issuers to sell more equity tranches rather than keep them on their balance sheets.

Pedro Errazuriz, co-founder of Ocean Capital, a London-based investment firm, is one of those specialist investors. He believes that with IAS 39 (the international accounting rule that prohibits any continuing involvement in assets to achieve off-balance-sheet treatment) now in effect and the new Basel II bank capital regime on the way, there will be incentives for issuers to shift first-loss tranches off balance sheet.

Other ABS investors, such as Amsterdam-based Faxtor Securities,