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ABS Market Down With the Times: ABS spreads gap out even further as the economy worsens and securitization stalls
Asset Securitization Report--SourceMedia (November 3, 2008)
The new issue ABS market remained virtually stagnant for yet another week, signaling that general economic conditions are only going to deteriorate further in weeks to come.
Adding further pressure is the flood of bid lists that have been hitting the secondary market as firms' balance sheets continue to be pressured and as hedge funds face rising redemptions. All this has only forced spreads out even further, according to traders.
"The pace of this de-leveraging has accelerated as hedge funds have come under pressure," JPMorgan Securities said in a report last week. "Mortgages have even become correlated with equities as de-leveraging hits all markets."
This has pushed rolls to some of their worst levels ever versus mortgage repo, JPMorgan analysts said, and until rolls improve, "mortgages will clearly struggle." However, despite the wide spreads, current coupon ROE is still below record levels (currently 20%), because of poor roll financing, the analysts said.
Still, pricing remains a challenge. One ABS trader said if he can get one third of the ask spread it's a good trade.
However, there are some good bargains out there on the consumer ABS side, another trader pointed out - which makes it a prime time to buy if you have the cash, he said.
Indeed, the consumer ABS space faces increasing challenges. Last week, AmeriCredit Corp. said it was cutting its targeted run-rate of monthly originations to just $100 million per month, after reporting a net loss of $1.7 million, or $0.01 per share, for its fiscal first quarter ended Sept. 30.
Finance receivables 31-to-60 days delinquent were 7.4% of the portfolio on Sept. 30, 2008, compared to 5.5% on Sept. 30, 2007. Accounts more than 60 days delinquent were 3.6% of the portfolio, compared to 2.6% a year ago.
AmeriCredit recently completed a $500 million senior-subordinate securitization of subprime receivables, using a senior subordinate structure. On an earning call last week, the company said that it was considering a second senior-sub deal that would potentially close before the end of 2008.
However, this transaction would most likely have higher pricing, and interest in the subordinated tranches is expected to be limited, according to Chris Choate, AmeriCredit's chief financial officer.
On AmeriCredit's most recent transaction, short-term paper priced at 100 basis points over Libor. The triple-A rated A-2 and A-3 notes have a one-year average life and a two-and-a-half year average life, respectively, with pricing at 400 basis points over Libor for the A-2 class and 500 basis points over Libor on the A-3 class of notes, according to the ASR Scorecard database.
Credit card issues are also expected to take a harder hit in the coming months, as compression between Libor and prime will place pressure on the margins banks earn from their credit card operations, according to a report last week from Merrill Lynch. This is because variable-rate liabilities tend to be Libor-based and variable-rate assets tend to be prime based. A decline in purchase volume reduces interchange fees, a source of revenue for credit card issuers, the bank analysts said.
Recently, Moody's Investor Service put out a report forecasting that Moody's charge-off rate index would rise to approximately 8.5% - a jump from the 7.1% post-recessionary peak in May 2003, the rating agency said.
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