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Subprimes Not Dead for American General
Asset Backed Alert, Harrison Scott Publications Inc. (March 26, 2010)

American General is about to start shopping the second in what could be a series of securitizations this year, this time in the form of a deal backed by subprime mortgages. The offering, totaling $800 million, is set to hit the market within the next two weeks via lead underwriter Deutsche Bank. It would be backed by 30-year fixed-rate loans that were mostly written 3-7 years ago through American General's own branches, with no credits newer than 18 months old.

The transaction is separate from a securitization the Evansville, Ind., unit of AIG is poised to price in the coming days. RBS is leading that $1 billion issue, backed by alternative-A credits written through brokers. The alt-A deal was seen as a rarity when it hit the market just over a month ago, as it was among just a few private-label mortgage securitizations to go into development since the global credit crisis intensified in late 2008. Even then, however, subprime-loan issues were presumed extinct.

Indeed, investors have been treating subprime-mortgage securitizations as toxic for nearly three years. But American General is touting some characteristics that might ease buyers' concerns. For instance, the underlying borrowers have full documentation, were fully examined by the company and most have made 50 payments or more - factors that have often been missing from poorly performing loan pools.

There will also be substantial credit enhancement for the deal's triple-A-rated senior class, in the form of three or four subordinate pieces equal to about half the top-rated tranche. Deutsche plans to pitch the top class to large "real-money" investors like insurers or pension plans, while shopping the junior notes more quietly among hedge funds.

After that, American General could try to complete six or seven more deals over the course of the year. Most if not all would be backed by subprime loans, mainly from a $10 billion mortgage portfolio the company holds in what it calls its centralized retail pool. It could also draw on a smaller book of brokered loans.

Deutsche would likely run the books on deals involving the retail portfolio with RBS as a co-lead, as is the case with the upcoming subprime-mortgage issue. The arrangement reverses for brokered-loan deals, with RBS in front and Deutsche as a co-lead. American General is also in talks with whole-loan buyers.

Like other mortgage-bond issues that have gone into development in recent months, American General's securitizations are being talked about as indicators of how the new-deal market will unfold in the months ahead. Other issuers might see successful offerings as justification to pitch bonds of their own, including Wall Street dealers and hedge funds that bought loans on the cheap.

American General has never been a frequent issuer of mortgage-backed bonds, but sees now as an opportune time to use its loan-origination business to carve out a presence in the market. Subprime mortgages were once the lifeblood of the securitization business, accounting for more than $1 trillion of deals in the decade leading up to the 2007 credit-market crash. Amid rampant defaults, the flow of those deals slowed late that year and then shut off entirely in 2008.

 

 

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