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Nervous Buyers Find More Reasons to Flee
Asset Backed Alert, Harrison Scott Publications Inc. (August 8, 2008)

The market for asset-backed bond issues just got a little worse.

Extending a decline that began a month ago, the values of newly offered securitizations plunged this week - to the point where issuers and underwriters have essentially given up on negotiating pricing with investors. Instead, most sell-side players are now willing to float deals only if they've lined up buyers in advance. "All that matters now is liquidity," one trader said.

The cause of this week's rout: an onslaught of bad financial-market news that shows lenders and consumers are still feeling the pinch of the credit crunch and broader economic woes. Troubles at Citigroup and the Big Three automakers had an especially strong impact.

Anticipation of painful midyear earnings reports had already caused the values of new asset-backed bonds to fall in recent weeks, nearly erasing gains that took place in May and June. Now that many of those results have come in even weaker than expected, prices are headed toward new lows.

What's more, most issuers and underwriters are reluctant to venture guesses about when the decline will end. And because many of them are unable, or unwilling, to cough up the necessary yields to complete deals in today's market, the flow of new issues has dried up - beyond the slowdown that usually takes place this time of year.

About $2 billion of fresh supply was making the rounds this week, down from about $3.5 billion a week ago. Meanwhile, any hopes that unfavorable pricings might be isolated to a few recent deals was fading quickly. "The days of thinking a print is bad are over," the head of one investment bank's syndicate desk said. "If you can show liquidity and get it done, God bless you."

With so few offerings in the market, the degree to which spreads have widened in the past week is something of a moving target. Industry players were buzzing on Wednesday after Bank of America managed to unload a 5.7-year offering of triple-B-rated credit-card bonds at 475 bp over Libor (see Initial Pricings on Page 10). The $275 million issue, prompted by a reverse inquiry, would have priced 25-30 bp tighter only two weeks earlier. "Now it's August and the market's thin and it's tough out there," another syndicate professional said.

Also this week, BofA sold $500 million of senior card-backed bonds that mature in five years. Its offered spread was 130 bp over Libor, which was 27 bp wider than what J.P. Morgan paid on a similar issue on July 23.

The mere fact that some deals are getting done shows that a few investors remain willing to buy. But their already-shrunken ranks are dwindling as more bad news circulates each day.

For instance, buysider nervousness escalated at the end of last week when rising borrower delinquencies and defaults prompted Citi to assign lower values to $9 billion of credit-card securities that it retained from its own securitization platform. "There are a fair number of negative headlines out there," one securitization banker said. "That [revelation from Citi] certainly can't help."

Chrysler, Ford and General Motors also scaled back or eliminated their auto-leasing programs last week, citing plummeting vehicle resale values - especially for gas-guzzling sport-utility vehicles and trucks. The moves had an immediate spillover on the values of auto-loan securitizations, which were already declining as part of the overall slump in bond values. For example, average secondary-market spreads on senior three-year auto paper jumped to 140-145 bp over swaps early this week, up 20-25 bp from a week earlier.

Instability at the federal mortgage agencies was also on the minds of buyers, as Freddie Mac added to recent difficulties by reporting a second-quarter loss of $821 million. The company also doubled reserves for future loan losses to $2.8 billion, in a clear signal that it expects to remain on shaky ground.

Mortgage-related woes struck at AIG as well, as the insurer posted a second-quarter loss of $5.4 billion and disclosed that it might have to pay as much as $8.5 billion on swap contracts tied to fixed-income products. It also cut $11.6 billion from the values of credit-default swaps and mortgage bonds in its portfolio, on top of $24.7 billion of writedowns it already reported since the credit crisis began last year That said, new securitizations of mortgage-related credits remain rare, as astronomical borrower defaults and declining home prices continue to undermine the values of outstanding issues. v



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