Investors were pleasantly surprised by the hidden value they discovered in the mortgage-related asset-backed securities sector last week, as a $649.7 million Ambac Assurance Corp.-wrapped home-equity transaction from Advanta Corp. priced at surprisingly cheap spreads.
"This is the best value I've seen in this market in many years," said Michael Hoeh, head portfolio manager at Dreyfus Corp. "I don't think I've seen anything price that cheap in awhile for fundamentally very attractive securities."
From a cross-sector relative-value perspective, the deal priced phenomenally cheap. An eight-year, AAA-rated wrapped piece priced at Swaps plus 123, while a five-year, AAA piece stood at Swaps plus 90. If the deal is compared to the five-year, piece of last week's single-asset commercial mortgage-backed securities deal, 1301 Avenue of the Americas Trust 2000-1301, an investor would have had to buy the BBB piece of that deal in order to get the same type of spread achieved in the AAA piece of the Advanta deal.
"And they all priced at discount-dollar prices, so the pricing on this one is a surprise," Hoeh said.
This surprise comes at a time when Advanta, which Hoeh describes as "somewhat of a bank-regulated entity," is looking at the potential sale of its mortgage division. Therefore, there may be some hesitance on the part of investors due to some of the headline risk associated with the comapny. Even still, however, the pricing of this Advanta deal is cheap even compared to paper from Green Tree Financial (now Conseco Finance), which is certainly perceived to have more headline risk.
"The fact that some people are not seeing the good quality of these securities when they are wrapped to a triple-A level is a little shocking," Hoeh noted. "And the syndicate on the Advanta deal was made up of Bear Stearns and Morgan Stanley Dean Witter, who are very involved asset-backed players. People are so shy about anything with any potential headline risk."
For the Advanta deal, the trust is utilizing a pass-through structure, and Advanta will retain the servicing and customer relationships of the mortgage loans.
The three-year tranche, for $123.25 million, priced at Swaps plus 67, while the two-year piece, for $54.64 million, priced at Swaps plus 45. Lastly, the 6.39-year piece priced at Swaps plus 69.