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Sluggish Issuance to Turn Back the Clock
Asset Backed Alert, Harrison Scott Publications Inc. (November 30, 2007)

A continued departure from traditional issuance patterns is in store for this month.

In the past, issuers of asset-backed bonds typically sought to tidy up their balance sheets by maintaining a heavy output of new offerings in the final weeks of each year. Investors happily absorbed the heightened supply until closing their books just before the yearend holidays.

The lush supply-and-demand technicals meant the values of asset- and mortgage-backed bonds rarely experienced significant late-year fluctuations.

However, the opposite scenario is shaping up this year, with no last-minute gush of offerings in the works. In fact, December could produce the lightest new-deal volume of any month since the credit crisis set in this summer - with many estimates for the month's worldwide production of structured products falling below a scant $20 billion.

The last time December issuance volume was lower was in 1995, when $15 billion of new deals priced, according to Asset-Backed Alert's ABS Database. But that was eons ago, in terms of the market's development in the past dozen years.

To put that in perspective, $230 billion of structured-finance transactions came to completion last December. That means next month's projected total would be less than a tenth of the year-earlier tally.

Of course, the securitization business has been in the doldrums for months. Since the beginning of August, just 393 transactions totaling $288 billion have been completed, down from 1,119 deals adding up to $779 billion during the same span in 2006. November accounted for a mere $27 billion of that total, putting the month roughly on par with 1996 levels.

If prospects for December issuance had even matched that amount it might have been an encouragement to industry participants. Instead, issuers and investors alike remain jittery about the potential depth of the credit market's troubles, with no prospects for a rebound in sight.

Perhaps that explains why the values of new asset- and mortgage-backed bonds, already depressed from this summer's market downturn, continue to fall even though there is so little supply to go around. For instance, Sallie Mae - a benchmark issuer - was shopping a $1.7 billion student-loan securitization this week at spreads that were wider than those on a $2 billion transaction it priced Nov. 1. Underwriter Citigroup was suggesting spreads around 40 bp over Libor for a $661 million batch of 7.5-year bonds with triple-A ratings from Sallie's new deal. The previous transaction contained a class of similar securities that priced 7 bp tighter, amid heavier overall volume.

Sallie's new deal was one of just a handful in the market this week.

The tone is no better on the secondary market, where banks, CDO managers, structured investment vehicle operators and the like are desperate to unload holdings that have lost much of their values in recent months.

The result in many cases has been a fire-sale atmosphere. "These guys are frantic. They're all screaming for bids," said one investor.

There hasn't been total disorder, however. "They're doing what they can, unloading their stuff, taking their losses and heading for the life boats," the buysider said.

Recent estimates have secondary-market trading down more than 95% since October, when activity seemed to be on a slow recovery from a near standstill in the previous two months.



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