CDOs/CLOs

In what some ABS market professionals described as a relatively light week, the ABS primary market turned out about $12.5 billion in new issuance. The credit card sector took a break from robust activity so far this year, and investors' reactions to lower retail sales and inflation data rattled Treasury yields throughout the week.

Amid a downturn in the U.S. housing market, a number of investors would shy away from pouring money into securities backed by subprime loans - much less the riskiest part of a mezzanine CDO backed by those bonds. But CDO equity tranche investors in this scenario could be paid long enough, at a high enough rate of return, to make the purchase worthwhile, according to Citigroup Global Markets.

The most recent bankruptcy within the U.S. auto industry is expected to put more pressure on areas of the country that are already facing growing unemployment, according to a Friedman Billings Ramsey report released last week. Furthermore, the dampening labor prospects in more than 70% of those areas are already inflicted by higher-than-normal default rates on residential mortgages.

The American Securitization Forum has released recommended best practices for the presentation and description of home equity trigger mechanisms. These best practices are aimed at promoting better disclosure of different collateral-based performance trigger mechanisms that change the allocation of cashflows in these types of deals, said the ASF in a release. The ASF believes that these improvements will increase the awareness as well as understanding of how these trigger mechanisms work, thus promoting more efficiency in the secondary market for home equity mortgages.

Leveraged loans are expected to become the next collateral type in line for growth within the synthetic arena. Despite the increasingly wide use of synthetics within ABS CDO structures, pure synthetic deals are not expected to overtake cash and hybrid deals as the most commonly issued structure, according to a Fitch Ratings report released last week.

Performance of both high-grade and mezzanine CDOs should remain on par with one another, as long as the national U.S. rate of home price appreciation remains at a long-term average of 5%, according to Lehman Brothers. Analysts at the investment bank wrote last week that a more challenging scenario for the consumer - such as a flat or negative rate of home price appreciation - would find the high-grade transaction significantly less affected than its mezzanine counterpart.

GSC Capital Corp., a New York City-based REIT, is making its debut this month with a couple of back-to-back, virtually spotless deals totaling about $857.1 million.

Dominion Bond Rating Service has developed a new model, based on historical data of repeat house sales, that estimates a particular property's propensity to lose or gain value, with implications for credit analysis.

At least six CDOs are at risk for a downgrade following the troubled auto parts supplier Dana Corp.'s bankruptcy filing on March 3.

The credit rating agencies came under fire last week at a Senate committee hearing where critics called for legislation to address potential conflicts of interest and barriers to competition.