CDOs/CLOs

At least half-smiles must be creeping across the faces of home equity ABS investors, as even the most notoriously bearish participants collectively shift their outlook on rising long-term interest rates. While Treasurys are expected to rally on anticipation of lower-than-expected long-term interest rates, adjustable-rate assets should also enjoy fewer defaults and delinquencies in that scenario, analysts say.

The U.S. ABS primary market priced over $18 billion last week as the auto and credit card sectors carried a palette of deals. The big stories of the week were General Motors Corp.'s announcement that it will cut 25,000 workers by 2008, and Federal Reserve Chairman Alan Greenspan's forecast for the U.S. economy.

ABS issuance in the credit card industry might see a slow-down in the short-term as consolidation gains traction with the recently announced acquisitions by Citigroup Inc. and Washington Mutual Inc. Over the long term, however, fewer players might give the sector a boost.

Despite CREMAC's recent sale of $180 million in high-yield bonds previously earmarked as collateral for the firm's first CDO offering, it intends to issue its three CDOs this year using different collateral, said Joseph Cafiero, president of the New York-based asset management firm.

Analysts with Moody's Investors Service said they are giving Ford Motor Co. and General Motors Corp. six months to prove themselves worthy of their current ratings. Speaking at Moody's' Auto Securitization Briefing last week, Bruce Clark, senior vice president in the financial institutions group, gave a run-down of areas Moody's will be watching over the next six months to decide whether to hold or drop the ratings of the two manufacturers.

Troubled lumber company Scotia Pacific Company LLC is working with UBS Securities to restructure $734 million of timber-collateralized notes. Scotia, a subsidiary of Houston-based MAXXAM Group Inc. is widely anticipated to miss its $27 million coupon payment due July 20, and in a June 9, Securities & Exchange Commission filing announced that its noteholders hired law firm Bingham McCutchen LLP as counsel and investment bank Houlihan Lokey Howard & Zukin as financial advisor.

Analysts at rating agency Fitch Ratings warned recently against relying solely on historical credit default or ratings data to decipher the level of risk involved in a particular CDO tranche. Instead, using market-based methodologies provides a more accurate picture of the amount of risk inherent in a prospective investment.

The market may begin to see increasingly more re-issued market value CDOs. That's because a significant amount of market value CDOs, which have performed relatively well, were launched in the late 1990s, so the first crop of such deals is reaching maturity now, according to Joo Hong, associate director at Fitch Ratings. Traditional market value CDOs typically have maturities of seven to eight years, while credit opportunity funds generally mature in five years, a CDO underwriter said.

Year to date as of 06/09 Term (days) 06/03 06/06 06/07 06/08 06/09 1-week

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Citigroup 5,480.7 1 14.6 10 Deutsche Bank AG 4,741.0 2 12.6 9 JP Morgan 4,289.5 3 11.4 7 Merrill Lynch & Co Inc 4,114.9 4 10.9 7 Credit Suisse First Boston 4,111.9 5 10.9 8 Barclays Capital 3,870.9 6 10.3 7 Banc of America Securities LLC 3,433.1 7 9.1 7 Wachovia Corp 3,362.5 8 8.9 7 Goldman Sachs & Co 1,841.0 9 4.9 2 Lehman Brothers 1,455.3 10 3.9 2 Industry Total 37,637.4 - 100.0 37 Source: Thomson Financial