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Decelerating Home-Eq Volume Curbs Supply
Asset Backed Alert, Harrison Scott Publications Inc. (July 7, 2006)
It looks like the worldwide volume of new structured-finance transactions might stop expanding this year after all.
Although the supply of new asset-backed securities, residential and commercial mortgage bonds, and collateralized debt obligations around the world climbed by 17% during the first six months of the year, to $1.1 trillion, market players say a second-half slowdown could be in the making. That means it could be difficult for issuers to match their 2005 volume of $2.1 trillion, even though they're currently on pace to do so.
If they do fall short, it would mark the first time in recent memory - and perhaps ever - that the market has contracted. And even if they come out ahead, it won't be by as much as last year, when new-issue volume grew by 41%, according to Asset-Backed Alert's ABS Database.
Of course, new-issue activity has proven difficult to predict before. Industry participants have been saying for at least two years that the flow of deals would decelerate as rising interest rates and a drop in home prices cut into mortgage and home-equity lending, which have driven the market's growth in recent years.
But as recently as April, a healthy supply of mortgage-related transactions had many going back on those forecasts.
In the meantime, however, U.S. real estate values leveled off and even dipped in some areas - meaning their earlier predictions were starting to come true. Indeed, Deutsche Bank researchers Karen Weaver and Anthony Thompson wrote in a recent report that slower growth among home-equity loan securitizations would likely lead to a broader contraction in the new-issue market.
Securitizations of mortgage-related collateral in the U.S. totaled $484 billion during the first half, accounting for 42% of worldwide structured-product issuance. That means such deals, including those backed by prime-quality mortgages, now make up a slightly larger chunk of the market than they did a year ago.
After home lenders, CDO issuers have been producing the most offerings. They completed $168 billion of new deals during the January-June stretch, which accounted for 14.6% of all new securitizations. A year ago, such issuers only made up 10% of the market, placing them behind sellers of bonds backed by commercial mortgages and non-U.S. home loans.
The CDO sector's rising stature can be attributed largely to a surge of deals that are either backed by credit-default swaps or issue such products. Both funded and synthetic CDOs may become scarcer in the near future, however, as it's getting harder for portfolio managers to get their hands on structured-product and leveraged-loan collateral with suitable coupons and credit profiles.
Merrill Lynch, which was the world's top underwriter of CDOs in 2004 but then lost that title in a close race with Citigroup last year, has returned to the lead with $22.8 billion of first-half deals. That places it $6.8 billion ahead of Citi, which slipped to second place.
In the broader structured-finance arena, Lehman Brothers is well on its way to winning the worldwide bookrunner derby for a second consecutive year. The bank heads into the second half with $91.8 billion of assignments under its belt, followed by RBS Greenwich Capital and parent Royal Bank of Scotland, with a combined $87.6 billion.
Lehman's total includes $30.6 billion of private-label mortgage bonds from U.S. issuers, where the overall first-half tally came in at $267 billion. The bank is topping that market as well, leading 2005 frontrunner Bear Stearns by a mere $225 million as of June 30.
Among underwriters of U.S. asset-backed securities, however, Lehman slipped from first place at yearend to the number-three slot six months later, while accumulating $38.3 billion of league-table credit. It's now behind Citi, which managed $40.3 billion of such deals, and second-place Greenwich, whose year-to-date total registers at $39.6 billion.
All told, $430 billion of asset-backed transactions priced in the U.S. during the first half.
In Europe, Deutsche now rules the roost after finishing second to Barclays Capital in 2005. Of the $179 billion of ABS, residential and commercial MBS, and CDOs that priced in the region during the first half, $13.9 billion went to the big German bank. Barclays, meanwhile, laid claim to $12.8 billion of assignments.
Asset-Backed Alert's primary structured-finance league table accounts for all securitizations worldwide. But it excludes securities sold through commercial-paper conduits and the derivative portions of synthetic deals.