A cloud of uncertainty hangs over the asset-backed market, as underwriters and market-makers tinker with price discovery, and the prospect of a severe recession looms on the horizon. Still, a small handful of deals slipped through the gates last week, pricing, for the most part, within 10 basis points to 15 basis points of levels seen two weeks prior, just before Wall Street watched the Twin Towers - symbols of global economic infrastructure - crumble and layer the better half of lower Manhattan's financial district in a thick, gray, acrid soot.
Following efforts to reestablish normalcy, asset-backed players were impressed with the market's performance, as it swung back to business with little delay (first deal Tuesday), and levels were said to be rational, all things considered. Meanwhile, spreads on investment-grade corporate secondary issues were fluctuating as much as 30 basis points, one analyst noted.
As expected, the ABS market reopened with benchmark issuers, first Chase Funding's $1 billion some-odd home-equity deal, followed by a $459 million deal off GMAC-RFC's RFMSII A' credit home-equity shelf. That transaction included another $458 million triple-A interest-only tranche.
Alongside RFC, MBNA brought out a three-times oversold, $750 million three-year, triple-A floater backed by credit cards, which priced 13 basis points over the one-month Libor.
"Three-year credit card spreads were in the five-to-seven over one-month Libor range before all this happened," said one market analyst. "If MBNA is three times oversold, it tells you that it should have really have been three or four points outside pre-World Trade Center pricing."
The market largely anticipated MBNA's presence, as the benchmark name has been known to break the ice following market disruptions, as it did during the Russian liquidity crisis of 1998.
Ameriquest announced a $600 million-range home-equity deal via Deutsche Bank, which was expected to have priced on Friday.
Just before the WTC fell, Irwin Financial, Chevy Chase and AutoNation, among others, were prepping deals that were inevitably postponed. All three had returned to the pipeline as of press time last week (Thurs.), although one researcher noted that non tier-one issues will likely widen out disproportionately to the benchmark names. Irwin came back to market with revised talk, out three points on the one-year triple-As, and between 10 basis points and 25 basis points on the longer dated classes.
There's no word on Merrill Lynch's $750 million rate-reduction bond deal for Texas power concern Reliant Energy.
Still, it will be interesting to see how the quarter-end rush-to-market plays out, as second-tier names that rely on securitization for funding will tap the market pretty much regardless of conditions, one analyst noted.
"Some of the second tier guys are going to try to make a go at it because they have to," the analysts said. "The top-tier guys, though, they're coming to market because they want to try to bring it back to normal."
In the end, what began as a potentially record-breaking month will likely fall short of original expectations, but an impressively strong run of issuance has demonstrated strong market fundamentals, analysts said.
Cited from Banc of America's daily commentary, "There are many encouraging signs that the market will return to a normal level of activity in the near term. Probably the most significant development that has improved liquidity has been the unprecedented sharing of information between investors and broker-dealers."
BofA sees the most liquidity in short-term floaters and on-the-run names.
The bears and the bulls
"The question is going to be, what impact is this going to have on consumer credit, consumer buying, and what does that mean?" said Brian Clarkson, who heads the Asset Finance Group at Moody's Investors Service. "I think people are asking, How is this going to impact deals that are outstanding, and how is it going to impact the deals going forward?'"
In the longer term, a prolonged and more severe economic contraction could have serious implications on the asset-backed market, both in terms of volume and the performance of deals. Concerns over consumer credit quality are steering some investors away from subprime product, be it real estate, credit cards, or auto.
"What will happen is that unemployment is really going to get a lot worse over the next six months," said Tom Zimmerman, a researcher at UBS Warburg. "I don't think anyone is doubting there is going to be a recession now. And I think it's going to be severe."
In its weekly, Warburg points out that, although credit pricing technology has improved substantially since the downturn in 1990-1991, credit itself has been extended much further down the spectrum, which is one reason why the U.S. consumer is so much more leveraged now than a decade ago. Warburg argues that in recent years, following a decade of economic expansion, underwriting standards had loosened in a bid to expand the market.
Barclay's researcher Jeff Salmon predicts that September credit card delinquency reporting will likely come in skewed, as consumers who have been emotionally shaken by the national disaster fall behind in their routines, which probably includes monthly bill payments.
"A lot of these credit card companies are likely going to waive delinquency fees, kind of trying to accommodate, but still in the reporting, you're going to see a large uptick," Salmon said. "Then in October, people are going to get it all back to together."
Apart from consumer credit, an outlook piece from Fitch names airline industry-linked structured finance and rental car fleet deals to be most volatile, from a ratings perspective. Fitch last week put all of its rated aircraft structured finance deals, both the pooled lease deals and the EETCs, on watch with negative implications (see EETCs p.1).
"With airlines right now, it's the whole industry," commented Barclay's Salmon. "It's not only the U.S., it has spooked the entire world. This is going to cause the chain of events. The rating agencies are going to have to go back and look at how to rate for catastrophic risk. There's going to be a lot ratings criteria revision."
Volume and spreads
According to several analysts, the ABS market is likely going to see a larger investor base, as investors that generally look at corporate deals might seek safety in the secured market. This has generally been the story since the economic slowdown began almost one year ago.
However, some players are now worried that panic and unloading by portfolio managers could negatively effect the ABS market the way it did following the liquidity crunch in 1998, following Russia's default. Then, as managers were forced to liquidate positions, they began selling off their more liquid asset-backeds, which caused a dramatic spread dislocation.
"Asset-backed bonds will usually be the first ones out the door," one analyst said. "We haven't seen this yet, and we might not see it at all, but if the bond market starts to reflect the equity market, there's no telling."
From a volume perspective, the slowdown combined with continued rate cuts will push more issuers into the market that might have found funding in other ways. However, if U.S. consumers are tightening, they might be less likely to rack up debt, buy cars and purchase houses. This could obviously level market growth going forward.
