While spreads in the primary ABS market have kept relatively firm over the past two months of uncertainty, prices in the secondary market, especially for less liquid names, have been all over the map.
"When we quote generic spreads, we're quoting high quality triple-As from names like MBNA, [Ford Motor Corp.], and [DaimlerChrysler]," said one bank researcher. "It's kind of deceiving. The top tier names are trading very well. Anything else is trading like crap."
Secondary trades of off-the-run bonds have been less frequent and sporadic, especially for sectors deemed risky, such as manufactured housing and franchise, as well as sectors directly impacted by the terrorist attacks, such as timeshare, pooled aircraft and rental car ABS.
Also, as the year winds down, dealers and investors tend to cleanse their portfolios and they would rather be in liquid names. Because of this, spreads should tighten in January, particularly on illiquid secondary bonds, as investors are ready to spend cash again, the researcher said.
Beyond the yearend effect, however, there have been several headline risk stories taking toll on segments of the market. For example, a source told ASR that the triple-A five-year A-class bonds from Providian Master Trust 2000-1 are being quoted at 150 basis points over swaps. Comparable fixed-rate five-year cards are generically quoted at swaps plus 20 basis points.
Currently, triple-A 12-year franchise bonds from Enterprise Mortgage Acceptance Co. are trading in the high 400s to low 500s over Treasurys range, while five-year A2 class Franchise Mortgage Acceptance Corp. paper is trading in the 300 over swaps range, according to syndicate sources.
A source with positions in FMAC views the A1-class bonds as relatively sound credits, but sees the longer life A2 and A3 classes as "quasi subordinates."
"There's only been a couple of trades on 10 to 12 year bonds, but they've traded very cheap," the source said.
High-yield vs. high-yield ABS
Because most ABS is rated triple-A, quoting prices on below investment grade, or "high-yield" ABS in the secondary market is generally un-chartered territory, and done on a credit-by-credit basis, researchers say.
However, some below-the-radar players are comparing high-yield ABS to high corporates. For example, Conseco Inc. has had a series of announcements lately, and spreads on its high-yield corporate debt have been particularly volatile. Similarly, the manufactured housing paper with Conseco's guaranty has "traded down in sympathy," noted John Devaney, president of United Capital Markets (UCM), which specializes in illiquid subordinate bonds.
Prior to Sept. 11, the single-B-rated MH corporate guaranteed paper was trading around 70 cents on the dollar. At the same time, the high-yield corporate paper was trading closer to par, but dropped to roughly 80 cents on the dollar following the terrorist attacks. During October, Conseco announced it would record a sizeable net loss ($475 million), associated with written down residual interests and other charges. That announcement sent Conseco's high-yield paper to 50 cents on the dollar. At the end of October, following Conseco's earning release and other announcements (such as the CEO purchasing one million shares of the company's stock), the high-yield bonds have come back somewhat.
Meanwhile, UCM purchased close to $29 million in the single-B corporate guaranteed MH bonds, and is offering approximately $12 million worth from two series - Green Tree 98-2 B2 and Green Tree 97-2 B2 - in the low 50 cents/dollar, which United thinks is a better value than the current high-yield Conseco counterpart. The single-B-rated junk bonds are yielding between 25% and 30%, compared to the ABS, yielding roughly 15%.
"The low 50s is the cheapest these [manufactured housing] Green Tree bonds have ever been offered," Devaney said. "And we think the corporate-guaranteed bonds are safer than the high-yield debt, because they're cross collateralized by assets. They don't yield as much as the high-yield, but many of the manufactured housing bonds could make it without the guaranty."