The sub-bond prophecy continues to play out.
According to Thomson Financial Securities Data, the percentage of single-A to triple-B rated ABS in the public market is at nearly 8%, or $2.8 billion of total issuance so far this quarter, 2% more than in the third quarter 2000, which had previously been a historical high.
Single-A to triple-B rated bonds have typically accounted for between 2% and 4% of ABS proceeds, according to TFSD.
This spike in market share is largely attributable to two large $1 billion-plus single-A tranches brought to market, one from HomeSide Mortgage, an Australian issuer, and the other from Ford Motor Credit.
Of note, Citibank's mammoth B-piece deals priced last year, and did not contribute to this quarter's share. Instead, Citibank shopped two series of triple-A rated senior notes in January, for more than $3 billion in proceeds.
Nevertheless, subordinate asset-backed securities continue to enjoy a strong bid, market sources said, both from the expanded universe of traditional investors able (and willing) to buy lower rated tranches, and from the collateralized bond obligation bid.
Last year, revisions to Employee Retirement Investment Securities Act (Erisa) guidelines allowed previously exempt pension fund managers to buy down the credit spectrum in ABS.
"I think that a lot of issuers are excited that the investor base has expanded for triple-B and even double-B paper these days, and they don't have to worry so much about placing double-B paper anymore," said Jeff Salmon, an analyst at Barclays Capital.
For example, last year Advanta Business Card and Americredit both began issuing deals with double-B rated tranches. Advanta retained its double-B piece while Americredit placed its entire deal with investors.
Still, Salmon noted, the demand for triple-A ABS has showed no signs of stress, so it's unclear at this juncture what will happen as demand for subordinate ABS continues to grow, and pricing shifts.
The CBO ramp-up
According to both market and rating agency sources, there are a handful of collateralized debt obligations backed by asset-backeds in the pipeline.
"I would say that the volume of ABS CBO issuance will be driven by the volume of collateral available," said a collateral manager of a ABS CBO, who is currently in ramp-up mode. "But it's more of a longer-term phenomena because the accumulation period is anywhere between six months and a year."
ABS CDOs will often hit the market with between 50% and 75% of the collateral already in tote, the collateral manager said.
On the other hand, in the high yield CDO market, the ramp up period can be as short as two weeks. Those deal can essentially come to market with no collateral.
"We know that these ABS guys are out there acquiring bonds, and people have been saying for a long time that it's going to improve the bid for subordinate ABS," said one rating agency analyst.
"So the fact that there's more subordinate ABS out there: is it directly attributable to CBOs of ABS? Certainly part of it could be."