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Attractive pricing in ABS sector offsets trauma felt in HEL
Asset Securitization Report--SourceMedia (February 12, 2007)
Ordinarily, a week of $20 billion in new ABS issuance would be considered a marvelous accomplishment, and one that would be expected for the market, especially after coming off of a major industry conference. Although the consumer ABS sectors hummed along with scarcely a worry, that buoyancy was juxtaposed against wild, painful gyrations in the HEL sector.
On Thursday morning, the ABS industry was greeted with widely publicized news about customer defaults in HSBC's subprime mortgage portfolio and New Century announced that its new loan volume was declining. The ABS industry reacted immediately to Thursday morning's news, punishing the new ABX index with nearly uninterrupted selloffs throughout the day.
A generally illiquid market chose to put its money to work on shorting the BBB-' indices. Investors who preferred to take out long positions, while still believing in their fundamentals, are the fewer braver ones, said one market professional.
"You don't have time to work out of a long position," that market professional said. "If you blink, you could lose 50 basis points."
This was inevitable.
Small wonder, then, that the couple of HEL deals that priced last week managed unenthusiastic pricing. The $416 million RASC 2007-KS1 transaction, led by Merrill Lynch, priced its BBB', 4.45-year tranche at 255 basis points over the one-month Libor, while its AAA', one-year tranche came in at six basis points.
Lehman Brothers' $296 million Structured Asset Securities Corp. transaction saw its AAA', one-year piece price at 10 basis points over the one-month Libor, with its BBB', 4.68-year tranche coming in at 250 basis points over.
The consumer ABS sector outside of HEL had a solid week, with autos and credit cards making up the rest of non-HEL issuance.
The squeaky clean Volkswagen Auto Loan Enhanced Trust led by HSBC, saw its short-term piece come in at five basis points under Libor, while the 2.67-year priced flat to the one-month Libor.
Those good times, however, will likely be clouded over by developing news from the student loan ABS sector. Blame proposals from President George W. Bush and Congress to cut federal student loan subsidies, because as far as anyone can tell at the moment, they will be a nuisance to everyone from students, small lenders and consolidators to ABS investors who might see smaller excess spreads in SLABS structures.
Still, legislative changes are always a long process. If proposals are finalized and implemented, the student loan sector will likely have developed a way to soften the blow to notes backed by loans made after next July. Market professionals, however, should expect the new system to influence pricing on near-term issues.
(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.