CDOs/CLOs

Wachovia Securities reached a settlement with its former head of CDO research, Arturo Cifuentes, who filed a Sarbanes-Oxley complaint against the bank arguing that he was improperly dismissed. The settlement, however, may not mean the end of the Securities and Exchange Commission's ongoing investigation into the matter.

In what may not come as a huge surprise to market participants, large CDO managers in 2005 became even larger - with 28 collateral managers representing half of the U.S. CDO market in terms of outstanding liabilities by the third quarter of the year, according to Standard & Poor's. The 10 largest managers last year comprised almost 30% of the CDO market.

Tiering in the auto sector is poised to shift, Lehman Brothers predicts. Some nonprime and subprime auto deals should start trading tighter relative to prime paper, as financially struggling U.S. automakers force ABS investors to re-evaluate tiering in the sector.

Default rates among subprime loans rose 56.5% - or 187 of the 331 metropolitan statistical areas in October 2005 from the year-ago period, according to Friedman Billings Ramsey. On average, however, the default rate for subprime loans fell to 6.16% from 6.38%.

Consensus for overall ABS issuance volumes for 2006 is steady as she goes.' Most expect the final tally to come in near $700 billion, and close to the 2005 total, assuming shifts in volume among classes. In any case, the backdrop to all the sectors will be closely tied to the consumer credit outlook. While consumers remain highly leveraged, and home values are soaring to all time highs, "both job growth and accumulated real estate and financial wealth will provide a cushion," said Ivan Gjaja, director and head of ABS research at Citigroup Global Markets. "We're unlikely to see a sharp deterioration."

The U.S. ABS primary market showed its first signs of life last week as issuance nearly doubled from the previous week to hit roughly $14 billion.

The pace of collateralized loan obligation (CLO) issuance is expected to remain strong in 2006, as long as leveraged loan issuance, liquidity, default rates, liability and underlying collateral spreads, and investor demand for CLO equity remain stable this year, according to market sources. The consensus is that issuance should be at least on par with or higher than 2005's CLO issuance levels.

As the U.S. economy expands and the Federal Reserve continues its gradual uptick on medium- to long-term interest rates, overall bond issuance is forecasted to decline 13.3% to $3.56 trillion in 2006, compared to $4.10 trillion in 2005, according to results from a recent Bond Market Association survey. However, while issuance is expected to fall in interest rate-sensitive sectors, it is anticipated to either stay steady or rise in others that are not driven by rate fluctuations.

Year to date as of 01/12 Term (days) 01/06 01/09 01/10 01/11 01/12 1-week

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JP Morgan 11,800.8 1 13.5 19 Banc of America Securities LLC 11,322.3 2 13.0 15 Wachovia Corp 10,417.0 3 11.9 18 Deutsche Bank AG 9,669.1 4 11.1 17 Citigroup 8,734.1 5 10.0 16 Merrill Lynch & Co Inc 8,193.7 6 9.4 11 Barclays Capital 6,698.2 7 7.7 12 Credit Suisse First Boston 5,791.5 8 6.6 12 Goldman Sachs & Co 3,564.1 9 4.1 4 HSBC Holdings PLC 3,334.4 10 3.8 5 Industry Total 87,387.4 - 100.0 87 Source: Thomson Financial