SAN DIEGO — Sinking mortgage rates will help relieve unrealized loss pressures at corporates this year, said portfolio managers for the four largest corporates. The corporates were already anticipating removing a portion of mortgage-backed securities from balance sheets this year due to amortization; factors driving refinancing will help reduce securities exposure even more.
And, unless they have been written down to reflect a permanent impairment, securities pay 100 cents on the dollar at maturity. That means corporates can purge the related unrealized losses from their books.
The $36 billion U.S. Central is anticipating a $5 billion reduction in its investment portfolio during 2009 due to amortizations and prepayments, said Dave Dickens, senior vice president of asset-liability management. He estimated that the book value of U.S. Central's investment portfolio will fall to around $30 billion by the end of the year.
The $28 billion Western Corporate Federal Credit Union is expecting between $2 billion and $3 billion in paydowns on its $23 billion portfolio in 2009, said Jeff Hamilton, vice president of portfolio management.
"There's talk in the market about 2009 becoming the mother of all refinancing waves," Hamilton said, referring to both sinking mortgages rates and refinancing and restructuring programs that will come from government and financial institution programs.
The $10 billion Southwest Corporate Federal Credit Union could see a 20% reduction in its unrealized losses if spreads and prices remain the same, said Bruce Fox, chief investment officer.
"About 90% of what we're reporting as unrealized losses is related to mortgage-backed securities," Fox said. "We expect about $800 million, about 20% of our mortgage-backed portfolio, to pay down in 2009."
The $8.7 billion Members United Corporate Federal Credit Union is forecasting an estimated $600 million in MBS paydowns in 2009.
"I think the key for us is that our exposure to a lot of these sectors will decrease drastically over the next 12 to 24 months," said Chief Investment Officer Ronald Koza.
The first quarter generally brings a big ramp up in deposits at corporates, as member balance sheets swell with the year-end bonuses, last-minute IRA deposits and tax refunds. Koza, Fox and Hamilton generally agreed that despite the poor economy, corporates will probably see deposits swell until tax season, though the influx might not be as large as past years.
"True, this year there are fewer bonuses, but people who lost their jobs or had hours reduced during the year ended with a lower tax rate, so they will probably see more coming back to them in terms of tax refunds," Koza said.
Because member deposits tend to decrease after April 15, the men said they don't typically invest those funds in asset-backed securities because their average weighted maturities are too long to maintain proper liquidity. Nonetheless, corporate portfolio managers aren't replacing those maturing investments with new ones, as they have for decades.
Dickens has said before he plans to keep U.S. Central lean and mean, keeping assets low to reduce borrowing needs and solidify capital ratios.
Hamilton said his members have needed funds, so WesCorp's spare cash has taken the form of loans to members. Koza and Fox said they're experiencing the same thing.
Hamilton said he does anticipate purchasing some new pass-through securities, but said more market assessment is required to determine which assets will hold value.
"The market is in such a flux, it's almost like nowhere to run and nowhere to hide," he said. "When it comes to securities, whether backed by mortgages, student loans, auto loans or credit cards receivables, corporates have been in the market for quite some time. Going forward, we'll have to determine which will offer the best tradeoff of safety and yield."
Looking ahead, the portfolio managers agreed that future securities purchases will include vehicles with well-defined cash flows and government guarantees, like agency mortgage-backed securities and guaranteed student loans; they seemed soured on securities backed by consumer loans, thanks to poor economic forecasts that have anticipated the unemployment rate to rise as high as 10% by the end of 2009.
Fox said he expects corporates to remain in the business of buying and holding securities but said the market has taken such a beating, it will offer significantly different products after regulators make some anticipated changes.
Corporates aren't expecting to make any staffing changes in investment departments this year, despite a smaller portfolio to manage.
Koza said Members United has already made "some pretty significant changes," referring to staff cuts at the end of 2008.
"We're back to our pre-merger staffing levels," he said. "We did this proactively because we want to operate as efficiently as possible to benefit our members."
Corporates also said they will delay or scrap some new product and service launches; however, they declined to talk specifics, saying the projects could resurrect when markets and the economy recover.
"We have put some focus back into our core markets, focusing on the sales of things other than investments," said Members United Senior Vice President of Marketing Vic Vrigian.
–handerson@cutimes.com

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Corporates 'Unrealizing' Losses in 2009 With Amortizations and Prepayments

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