Production volume in the securitization market was low last week, as market participants came off of the third quarter's end and a holiday weekend. Still, distressed-debt funds and choosy investors kicked up enough dust to let the market know they would be choosy about the kinds of debt they buy, at least for the time being.
"The market is on much firmer footing as real money investors again put cash to work in various sectors," analysts at Deutsche Bank Securities wrote in a recent report. "Investors looking for relative value opportunities are targeting cards, autos, student loans (private and FFELP), AAA'/AA' HEQs, and seasoned bonds. All these sectors offer significant pickups from historical averages after widening dramatically during the August/ September credit crunch."
Market sources concurred. As one trader noted, investors are still worried that house price appreciation statistics could be negative enough to continue to affect double-A and single-A HEL trades. For the time being, most are content to shop around for attractive premiums on high-quality triple-A-rated MBS.
"Buying triple-As is easy, but anything below triple-As, to the market's eye, is a problem," a source said. Despite their misgivings about the credit quality of certain mortgage-backed securities, a lot of investors are looking to play the role of liquidity provider and deploy capital raised by distressed-debt funds, as well as the traditional sources of liquidity.
The Ellington Loan Acquisition Trust was one such transaction that waded back into the ABS market, and investors appeared to express that bargain-hunting mindset as they bought up a lot of the deal's top-rated securities. According to preliminary pricing information, the triple-A-rated, two-year tranche priced at about one-month Libor plus 90 basis points, about five points wide of guidance levels. Another triple-A tranche, with a duration of 7.6 years, priced at one-month Libor plus 150 basis points, also wider than guidance, which was at 135 basis points over the benchmark.
The story was slightly reversed on the single-A tranches, according to preliminary data. The five-year tranche - rated A2' and A' by Moody's Investors Service and Standard & Poor's, respectively - priced at 200 basis points over, after its guidance was talked at 500 basis points over the benchmark. Just below it in the waterfall, the tranche rated A3'/A' by Moody's and S&P, respectively, priced at 185 basis points over one-month Libor. Guidance was originally at 600 basis points.
"Business is getting better and better, and you do have significant tiering," said one trader.
While the MBS market begins to regain its footing, consumer ABS assets continue to enjoy strong support from investors.
One trader noticed that asset-backed paper pegged against fixed-rate benchmarks was doing very well, especially after the Federal Reserve cut is fed funds rate by 50 basis points recently.
Late last week, the $2 billion Chase Issuance Trust, a credit-card deal managed by JPMorgan Securities, priced its five-year notes at 28 basis points over Swaps. It was unclear exactly how that deal stacked up against the $1.1 billion American Express Credit Account Master Trust, led by Deutsche Bank Securities and JPMorgan Securities. The triple-A bonds in that deal priced at one-month Libor plus 30 basis points, while the single-A tranche came in at the same benchmark, plus 70 basis points.
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