CDOs/CLOs

Not-for-profit state education finance companies are slowly but surely turning away from the auction rate bond market and migrating to the floating-rate ABS market for financing. Rating analysts attribute the shift to a troubled year in the auction rate market and increasing investor comfort with state issuers that have previously flown below the radar.

Optimus Corp., through its wholly owned subsidiary AmeriFirst Home Improvement Co., entered the term ABS market last week with an $81 million deal backed by subprime home improvement loans. The deal was led by investment bank Harris Nesbitt Burns.

In the midst of the dog days of summer, the ABS primary market generated a solid $14 billion in new issue supply last week, a slight improvement over the previous week and another step out of the summer doldrums as the market attempts to get back to its blistering pace.

In the wake of the Moody's Investors Service announcement that it would increase overcollateralization levels for subordinated home equity and subprime MBS transactions containing a certain percentage of manufactured housing loans, Lehman Brothers researchers quantified that risk last week. Concentrations of such exposure in recent home equity deals, however, are trending downward, Lehman analysts report.

Ameriquest Mortgage agreed last week to pay at least $7 million to settle predatory lending allegations in Connecticut, one of some two dozen states that are investigating the subprime lender's business practices. Whether the inquiries are a result of the lender's extraordinary public advertising campaigns piquing the attention of state attorneys general, or actual patterns of predatory lending, one of the lawsuits could bring other whole-loan market participants into the fold of litigation, sources report.

Hedge funds are growing increasingly prevalent across various market sectors, as the overall size and scope of the alternative investment vehicles require more capital to grow. But the tightened correlation hedge funds are causing among various sectors, including CDOs and derivatives, could cause an unpleasant domino effect across credit markets should a substantial credit event occur, Fitch Ratings warned last week.

ABCP got its share of attention last week as Fitch Ratings, Goldman Sachs and Standard & Poor's all held ABCP conferences in New York in what was dubbed "CP Week" by some. The conferences highlighted a variety of issues affecting the sector, but arguably the most salient topic was compliance with the eligible liquidity facility rule that becomes effective Sept. 30.

First-time timeshare issuer Silverleaf Resorts made its way into the ABS primary market last week with a $108 million private deal via UBS Securities, and it will likely become a regular issuer in the sector, sources said. Joe Conner, chief operating officer at Silverleaf, said the company would likely be bringing its next ABS within 18 months, and that future deals would be of a similar size.

The U.S. ABS primary market generated over $13 billion in new issues last week, ending what was beginning to look like a summer slump. After two consecutively declining sub-$10 billion weeks, the market saw a healthy dose of auto loan and credit card deals, with a student loan deal, a timeshare deal and a tax lien deal thrown in.

While some CDO managers appear to be doing a better job than others, investors have yet to demand a higher yield for a history of lackluster or poor performance, according to Standard and Poor's. By borrowing performance metrics most familiar to the bond world, the rating agency created a custom ABS benchmark and was able to find enough discrepancy in CDO performance to rank 25 collateral managers. However, the analysts emphasized that the results rank against only one benchmark, and are by no means comprehensive.