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CDO hunger plays role in tighter sub spreads, healthy ABS issuance
Asset Securitization Report--SourceMedia (October 30, 2006)
Market sources expected new issuance to total slightly more than $15 billion last week, thanks in no small part to continued demand for HEL tranches that will feed into CDO transactions. By press time, about a third of expected issuance had hit the market and priced.
Among deals that priced was the $824 million Goldman Sachs' GSAMP 2006-HE7 transaction. The deal priced against one-month Libor. The one-year, triple-A rated tranche came in at five basis points over, while investors that took the double-B rated, 4.33-year positions were rewarded with spreads at 775 basis points over the same benchmark.
Investors' ravenous demand for CDOs continued to affect pricing on the triple-B rated tranches of HEL deals, as the RASC 2006-EMX9 demonstrated last week. Residential Funding Corp. and Barclays Capital acted as lead managers on that transaction, which saw its 8.7-year and 12.1-year tranches priced at 100 basis points and 205 basis points over the one-month Libor. Among the most senior tranches, the one-year piece came in at seven basis points over the one-month Libor, while the 6.24-year piece priced at 24 points over the benchmark.
"There is huge demand for collateral in CDOs," said one market source familiar with the deal. The lead managers "were able to tighten levels on those classes and were oversubscribed six times."
Such demand was less evident on the RASC 2006-KS9 deal. Barclays Capital acted as lead manager on that transaction, which saw its lower-rated tranches price slightly wider than equivalent securities, said some market sources.
Ravenous demand notwithstanding, market players say that tiering is occurring across all names and sectors.
"Investors are becoming very, very keen on past performance for any issuer in the market," one market player said. "Investors are being much more concerned about past credit performance."
In the auto sector, HSBC Automotive Trust came to market with an $838 million transaction. Banc of America Securities, Credit Suisse and JPMorgan Securities acted as co-managers. The most senior piece was sold to the asset-backed commercial paper market, and priced at three basis points under the interpolated Libor. Meanwhile, the one-year tranche priced at just one basis point over the EDSF, and the most spread that investors could ask for was on the triple-A piece, at 14 basis points over interpolated swaps.
Otherwise, the ABS market continued to gear up for several other large auto and home-equity transactions. The $1.2 billion Pinnacle Capital began to pre-market, as well as the $657 million Ownit 2006-7 home equity deal. From across the Atlantic, the Arkle and Fosse issuers were preparing two monster deals, totaling GBP5.6 billion ($10.6 billion) and GBP2.5 billion respectively.
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