CDOs/CLOs

Ready to learn a thing or two about how to expand their corners of the ABS business, industry professionals are swarming around Las Vegas this week for the ASF 2007'.

To stay competitive, electronic gadgets in our day and age have to be multi-dimensional. It's not enough for a cell phone to merely make calls, it must also play music, send e-mails, take pictures and perform myriad other tasks. If it does only one thing, it will fail.

After much talk, it appears that Cairn Capital will produce the first managed CPDO, to be sold by arranger JPMorgan Chase & Co. The deal is among the latest in a string of variations on ABN Amro's flagship CPDO product, Surf, which debuted last Fall. While a number of investors are still scratching their heads as to how, exactly, the structure works, arrangers are cooking up plans for all sorts of CPDOs, including managed deals, those that reference the ABX indices and those that reference bespoke portfolios.

The majority of outstanding mezzanine CDOs will experience HEL downgrades within their portfolios this year, Lehman Brothers researchers wrote in a report last week. Given an environment with 5% home price appreciation, roughly 90% of mezzanine CDOs originated between 2003 and 2006 will have exposure to HEL bonds due for a rating agency downgrade, the researchers said. What's more, one-fifth of outstanding mezzanine CDOs have 10% or more exposure to the expected downgrades, and in a flat HPA scenario, roughly 30% of outstanding CDOs would have a 10% or higher exposure.

During its last full workweek of January, the ABS market started off by displaying a full spectrum of sentiments. On one extreme end, investors remained wary of spread levels to enter into ABX trades after the rollout of the third ABX.HE index, series 07-1.Trading on that rollout started on Jan. 19. Conversely, issuers were eager to exhibit their wares ahead of the popular ABS 2007 industry conference now underway in Las Vegas.

U.S. small business loan ABS will likely undergo higher delinquencies for the first half of 2007, because of shifting economic conditions and credit concerns.

By David Glehan, director, and Amanda Hopkins, rating specialist, Standard & Poor's

The consumer credit outlook for 2007 looks benign. Although mortgage delinquencies and foreclosures are rising, they are up from exceptionally depressed levels. There was little room for them to go anywhere but higher.

Home equity loan downgrades could increase by three to four times this year compared with the second half of 2006, Lehman Brothers said last week in a report. Such an increase would mean as many as 1,500 bonds could be at risk for a downgrade, given a 0% to 5% national rate of home price appreciation.

A handful of managers are tweaking RMBS deal structures in order to achieve a Moody's Investors Service triple-A rating on super senior tranches they would not be able to obtain otherwise. The structural nuances essentially burrow the so-called senior support tranche into a more subordinated position in order to protect the super senior tranche. At least for the deals that have been rated so far, the senior support tranche and other senior interest would not receive a triple-A rating per Moody's rating methodology, but that's not to say the manager could not shop around for one.