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Market Shrugs off Ambac En Route to Mini-Rally: Now, as investors propose swaps, the Street holds out
Asset Securitization Report--SourceMedia (April 28, 2008)

Donna Mitchell

What a difference the need for cash makes. The securitization market did a brisk business in consumer ABS paper last week, oversubscribing to a USAA auto deal and blowing out a Discover Financial Services credit card transaction.

The historic plunge in Ambac Financial Group's share price? Didn't happen. Merrill Lynch's second stumble in as many weeks? Bygones, apparently.

Various market sources had a couple of different takes on where investors got their inspiration, despite the gloomy financial sector news. They did agree, however, that whatever the motivation and eventual outcome, investors felt that it was time to spend.

An $850 million transaction from DCENT, Series 2008-A3, the Discover credit card master trust, was one beneficiary. Market sources say the deal size was increased from $500 million. Also, the single-tranche deal, with an average life of 2.96-years, came in at swaps plus 165 basis points. Credit Suisse and JPMorgan Securities were lead managers on that transaction, with Banc of America Securities, Barclays Capital, Lehman Brothers and RBS Greenwich Capital acting as co-managers, said a source familiar with the deal.

"Guys just have a ton of money to invest and they couldn't sit on it anymore," said one trader. Still, that market source was reluctant to declare that the market had bottomed out, leaving nowhere to go but up. He added, "I would never want to call a bottom. Any landmine could blow us up in a couple of days."

Investors who were replicating in derivative positions - meaning those with enhanced cash needs and who needed to buy - gave the securitization market a boost of energy last week. That was one buy-side source's explanation for the rally.

"The market shrugged off the Ambac and Merrill news from yesterday like it didn't even happen," he said. The rush of money might be short-lived, however, because it remains to be seen whether those cash buyers have enough money to sustain the rally over a lengthy period.

Last week, however, issuers enjoyed better participation on their deals. A $1 billion USAA Auto Owner Trust, Series 2008-2, transaction came to market via Banc of America and Citigroup Global Markets. Its one-year, triple-A rated piece came in at 100 basis points over the EDSF.

Another consumer ABS transaction, the $1.4 billion Nelnet Student Loan Trust, Series 2008-3, priced its one-year, triple-A-rated notes at 80 basis points over the three-month Libor, while the three-year piece, similarly rated, came in at 105 basis points over the same benchmark. Barclays Capital, RBS Greenwich Capital, JPMorgan Securities and Dexia Capital Markets acted as lead managers on the transaction.

The opportunity to take advantage of fairly wide nominal spreads before things tighten in might already be getting a little scarce, as seen in spreads that had come in tighter by a range of 10 to 25 basis points, according to the trader.

The rally did not extend itself to investors looking to swap certain types of paper. One investor who held a 2.5-year portion of a credit card issue tried to swap into a recently issued five-year credit card deal. Both deals were managed by the same bank, but the bank wouldn't offer better pricing than a flat yield.

"You get no additional spread for going from 2.5 years to five years. We all know the answer to that," the investor said.

As for future deals, investor support is firmly behind consumer ABS transactions. Some market sources expect issuers who had been holding back on floating new ABS debt to come back to the market now that spreads have tightened a bit.

Market sources say they expect to see more amortizing auto deals, and at press time there was talk of a CARAT deal from General Motors with Citigroup as manager, although the bank could not confirm that by press time.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.



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