CDOs/CLOs

Fitch Ratings last week packaged its global CDO and structured credit services into a stand-alone company called Derivative Fitch - a move that is expected to allow the agency's derivatives ratings much needed breathing room from the one-dimensional nature of traditional bond ratings. Derivative Fitch will eventually offer credit ratings on a differentiated scale from the agency's traditional ratings, along with market risk analytics aimed to help to lift the veil of opacity long associated with the market.

Wisconsin Electric Power Co. pulled the plug - at least temporarily - on plans to complete a $500 million ABS transaction to finance certain environmental upgrades to its facilities, saying it could not agree with other major players in the transaction about the distribution of liabilities in the transaction.

After a quarter-end push, followed by a two weeks of issuance dragged down by two major holidays, the asset securitization market began to chug back to life again last week. Market players expected primary issuance to hit around $12 billion for the week, about half of which priced by press time last Thursday.

Sea Containers, the Bermuda-based marine shipping container leasing company that filed for bankruptcy protection last week, is struggling with an inefficient capital structure and $467 million owed to more than 20 of its largest creditors, but market participants say the company should be able to keep its covenants related to its ABS transactions.

Like gamblers to Las Vegas, investors are pouring into the derivatives markets in the hopes of winning the jackpot - that is, placing the right bet on the ability of U.S. consumers to make their monthly mortgage payments in a slowing housing market.

CDO notes have generally been a better investment than corporate bond swaps over the past three years, Wachovia Securities analysts said in a research report issued last week. For the study, analysts used a performance analysis based on new-issue spreads over the time period. While mezzanine CDO investors have enjoyed quite a bit of yield amid the recently stable credit environment, analysts are recommending an up-in-credit and asset diversification strategy going forward.

Several factors have led to the significant increase in CDO issuance, including the relatively strong corporate performance and a large supply of loans, along with the increasing size of the investor base and the flexibility provided by synthetic structures, according to the Bond Market Association. The BMA made this statement last week in conjunction with the release of its quarterly global CDO issuance data.

Trust Company of the West's credit mortgage group, led by group managing director Louis Lucido and charged with managing more than $26 billion in assets, recently took time to answer questions on the state of the U.S. housing market, new CDO structures hitting the market and expectations on investor demand. TCW, based in Los Angeles, is the world's largest CDO asset manager.

Disclosure requirements under Regulation AB (Reg AB) might not be terribly useful to ABS investors for the time being, but in due time, periodic updates might allow investors to conduct meaningful, time-series analysis of ABS issues, particularly in the credit card ABS sector, according to market sources.

Bear Stearns agreed to buy Encore Credit Corp., the wholesale subprime lending business of ECC Capital Corp., last week, an event that added to a string of consolidations in the subprime lending industry.