Not only did the first ever asset-backed notes trade online last week, but the year's first modest flow of new issuance hit the market, with press time totals hitting five - yes, five whole deals - and still spreads continued inching in, all the way down to secondary trading.
"We had two very well priced deals happen here," one trader said. "The Conseco manufactured housing and the Nissan auto deal both went very well."
Secondary trading saw its share of action last week, said market sources. One trader remarked, "To be honest, not just this week, but the last few weeks have been busy."
"I think most of the week fixed-rate paper has been fully priced, basically for the past couple of weeks," another trader said. "And I think we kind of needed a little move in swap spreads to get us going. We kind of inched in about a basis point today."
The trader credited a tightening in ten-year fixed-rate notes to narrowing swaps, though complained that "the fixed-rate stuff is kind of road blocked to some extent by swap spreads lately."
"We're bumping in against swaps so closely that there's really nowhere to move until swaps come in again," the trader said.
Some Notable Deals
Leading autos into the year, Nissan North America came to market last week with a $758 million deal backed by auto loans. The deal was said to price rather quickly, as demand was strong, and overall spreads were in a point or two.
The four part transaction was managed by Chase Securities. A 0.3-year, $184 million A-1 class priced at two basis points over the four-month Libor. A one-year, $229 million, A-2 class priced at 17 basis points over the 12-month EDSF. The largest tranche, a 2.0-year, $250 million A-3 class priced at 68 points over Treasurys. A 2.99-year, $95 million priced at 74 points over Treasurys.
State of North Carolina Education Assistance, with First Union Capital Markets as manager, floated the second student loan backed deal of the year, with pricing comparable to the SMS Student Loan Trust deal. North Carolina's lone 3.77-year, $200 million A-class priced at 16 basis points over the three-month Libor, compared to the three-year, $310 million A-1 class SMS offered, which priced at 11 over the same bench.
The Discover Internet Deal
Of significance, Discover Financial Services conducted the first-ever asset-backed deal priced over the internet.
Via affiliate and manager Morgan Stanley Dean Witter & Co., the bonds were distributed over a global Internet platform.
Investors were able to access a description of the transaction, timing, terms and conditions and a series term sheet through the Internet along with the convenience of reviewing the final prospectus and prospectus supplement on ClientLink. Prospective investors were also able to enter their preliminary indications of interest as well as orders over the Internet.
"We look at it as offering the best of both worlds with our on-line distribution and traditional systems," explained Gail McDonnell, head of finance team for the securitized products group at Morgan Stanley. "We think the goal is to provide alternatives to the investors. One of the main benefits of the on-line system can be increased productivity for the investors and for the whole distribution process.
Morgan Stanley feels that one of the most interesting features is their ClientLink system. "Its something that we had research access to in the past and now we have on-line distribution,"said McDonnell. "This is the firms fifth bond deal with online distribution in the last week."
Whether or not Morgan will continue with on-line trading is "really going to be an issuer-by-issuer decision," said McDonnell. "[It will be] based on a number of things: everything from the issuers receptivity to investors receptivity to whether or not it is an appropriate structure for on-line distribution. We'll be accessing the factors on a proactive basis. We think that this whole world [internet] is evolving rapidly and our whole goal is to be evolving with or ahead of the market to constantly enhance what we're offering and providing the right strategy and advice to our clients."
In regards to the doubts floating around the market about the pricing of the deal, Morgan Stanley feels that it couldn't have went better.
"The objective of Discover for their first deal out of the box this year was We're a global firm, with a global strategy', and they wanted a global distribution on this transaction," said McDonnell. They didn't want a 5% or 10% feature, they wanted around half of the deal to go into international hands and that goal was achieved. That is why they offered a floater and truly directed it the international market, so it basically priced where that demand was. The bulk of international accounts that came in are accounts that have really not been active in Discover paper for quite some time. It has achieved the goal of bringing in people that have not really been active. The on-line feature did not affect the pricing at all."
According to one source, however, the Discover deal did not price as smoothly as it could have.
"I heard it priced at Libor plus 17," the source said. "That sucks to be honest. The deal was originally talked at 15 on Tuesday when we came in, and price guidance was revised today to like 16 or 17, and then we heard it priced at 17.
"I don't want to be bad mouthing anyone, but to be honest, their lead manager kind of had the deal in their pocket and they didn't work too hard to get the deal done at a tight level. And because of that, it makes everything else look rich. And a number of issuers that we speak to are kind of upset about the level that it priced at."
When the transaction was talked at 15 basis points over the one-month Libor, the deal looked "very constructive."
"It put the better names a basis point, or maybe two basis points inside it," the source said. "I think 16 would have been fair for Discover. But you know, if I'm offering better names at Libor plus 14, they're going to say, hey, that's four basis points inside of Discover."
