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Shaky Outlook Spurs Secondary Trading . . .
Asset Backed Alert, Harrison Scott Publications Inc. (January 25, 2008)

Trading of structured products picked up on the secondary market this week, as dimming prospects for an end to the credit crunch prompted investors to let go of their holdings at heavy discounts.

Opportunistic buyers said that sellers became more receptive to what had been below-market bids on Tuesday, when the Federal Reserve surprised many financial-market participants by cutting its overnight lending rate by 75 bp, to 3.5%. A handful of new deals, backed mainly by credit-card receivables and auto loans, also priced at wider spreads than they would have a week ago.

The reason: Even as the rate cut move cheered some areas of Wall Street, fund managers and investment banks that have been trying to unload huge structured-product inventories took the news as an indication that the Fed believes the credit crisis is still going strong. That means their holdings - especially those tied to the same troubled mortgage products that caused the debt-market squeeze- could continue to lose value in the months ahead.

Faced with that possibility, many are hoping to salvage some value by dumping already-devalued positions now. The Fed's move, meant to stave off a possible recession, could be followed by another 50 bp cut at its Jan. 29 meeting.

Adding to bondholders' nervousness is the possibility of more rating downgrades among bond insurers (see article on Page 1) and a continuing stream of dismal 2007 earnings reports from industry players.

Bond insurer Ambac, for example, this week reported a $3.3 billion net loss for the fourth quarter and said it was considering a sale of its business. Bank of America also reported $5.9 billion of writedowns for 2007, including a $5.3 billion cut in the value of its CDO-related holdings for the October-December period. And Wachovia announced $1.7 billion of fourth-quarter writedowns on CDOs and subprime-mortgage bonds.

Given the barrage of bad news, the sentiment is that "credit is not going to get better for a while. It's just going to get worse," said Dan Castro, chief credit officer at GSC Group in New York. That, in turn, helps explain why one opportunistic buyer said he was able to submit discounted bids on five packages of bonds this week and have them all accepted by the sellers, whereas last week he was 1-for-10.

So how big are the bargains? Single-A and double-A-rated home-equity loan paper that matures in two to four years is now changing hands at 22-32 cents on the dollar, reflecting a decline of 2-3 cents since last week, traders said.

Even securities backed by other types of collateral have been affected. For instance, one trader said he offered this week to buy a batch of two-year-auto loan securities issued by USAA at 150 bp over swaps. The top-rated securities had initially priced on Jan. 9, at 75 bp over swaps.

On the new-issue front, BofA priced $1.7 billion of top-rated credit-card bonds at 58 bp over Libor on Tuesday (see Initial Pricings below). That's 10-15 bp wider than the going rate a week earlier. It should be noted, however, that widening spreads haven't translated into a corresponding jump in yields, since the benchmarks that issuers use to price their deals have been falling.



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