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Conduit Output Buoyed by Issuance Twists
Asset Backed Alert, Harrison Scott Publications Inc. (May 19, 2006)

A few recent shifts in the asset-backed commercial paper market should bolster issuance volume for the rest of the year.

The rising deal flow would preserve a growth streak that has persisted for more than a year, even as a once-prolific flow of mortgage-related collateral has begun to tail off. As of this week, the Federal Reserve Board pegged asset-backed commercial paper outstandings at $914 billion, up 7% from $849 billion at yearend.

"I don't really see any reason for growth to slow," said Scott Spiegel, a director in the asset-backed CP group at Credit Suisse. "The second half looks like it's going to be a lot like the first half."

The rising tide of conduit activity is evident in the volume of paper that the market's top-20 administrators have in the hands of investors, as all but five of them boosted their vehicles' outstandings during the second half of 2005 - by substantial amounts in many cases, according to figures compiled by Moody's.

Citigroup, the perennial frontrunner among administrators in terms of outstandings, increased its volume by more than $7 billion, to $67 billion, during the July-December stretch. However, Citi didn't finish the year as far ahead of second-place ABN Amro as it had become accustomed to, as that bank's conduit outstandings jumped by $19 billion, to $65 billion, over the same period.

In addition to new business, ABN's total rose because the Dutch bank changed the way it reports outstandings, Moody's conduit chief Jonathan Polansky said. Indeed, the restatement caused ABN's mid-2005 volume, which was previously reported at $38 billion, to be listed now at $46 billion.

As has been the case for a while, issues by vehicles that invest in structured products or fund mortgage-related credits dominated conduit investors' portfolios at yearend. That's still true, but it was only recently that industry players were wondering whether the dwindling mortgage supply might slow the market's relentless march toward $1 trillion of outstandings. It turns out that other asset classes, including auto loans, have picked up the slack.

The new-conduit pipeline is also brimming with vehicles that mimic the market-value arbitrage techniques used by structured investment vehicles and collateralized debt obligations called SIV lites. "We haven't really seen a time like this in a while. The market is very hot," Credit Suisse's Spiegel said. "Everybody is looking at these types of vehicles."

Why the interest in such entities? Administrators want to capture some of the profits available to sponsors of leveraged SIVs and SIV lites, who are finding it profitable to retain portions of their subordinate capital notes. Those securities usually carry risk commensurate with triple-B-rated securities, while currently offering average returns of 150-190 bp over Libor. That's 40-80 bp higher than comparable home-equity loan bonds.



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