As the New York Federal Reserve moves closer to completing the winding down of its Maiden Lane (ML) vehicles, investors face a falloff in inventory volumes. This poses a further challenge in this yield-starved environment.

The New York Fed set up the ML I vehicle in early 2008 to facilitate the sale of Bear Stearns to JPMorgan Chase. The ML II and III vehicles were formed in November 2008 to prevent AIG from collapsing. ML II purchased $20.5 billion in fair value of RMBS from AIG's securities lending portfolio while ML III funded the purchase $29.3 billion in fair value of CDOs on which AIG had written protection.

The wind-down of these vehicles means the non-agency market will lose a consistent source of bonds it has had throughout 2012. This supply/demand dynamic will continue to support prices in the near term, Bank of America Merrill Lynch analysts said in a report released late July.

Barclays Capital, Citigroup Global Markets, Credit Suisse and Deutsche Bank Securities were among the winning bidders for the latest sale of roughly $4.5 billion of additional assets from the Maiden Lane III portfolio held by the New York Fed on July 31.

To date, about $31.6 billion in face value of CDOs has been sold out of ML III. After the July 24 auction for $3.5 billion in face value and the latest auction for another $4.5 billion, there will be less than $7 billion in face value left in the vehicle.

The Maiden Lane bid lists have drawn the attention of investors who remain concerned that supply in the non-agency and subprime markets will not be enough and are looking to pick up bonds while they can, BofA Merrill analysts stated in the report.

"The auctions, which had once served as a negative overhang on the market, were more recently viewed by investors as an opportunity to source sizable positions in a rapidly shrinking sector," the analysts wrote. "The general thought of 'get 'em while you can' is already prevalent in the market, and removing Maiden Lane supply will only stoke this mentality."

Non-agency sales from the ML I portfolio averaged just $390 million in par value per month in 2010 and $320 million per month in 2011 as the majority of MBS sales were from the vehicle's agency holdings.

But in 2012, as market conditions improved, the Fed picked up the pace of sales. Through May, 449 of the 753 deals held at the start of 2012 were sold with no disruption to the market. By the end of May 2012, only $3.7 billion remained of the original $27.8 billion that was in the portfolio.

BofA Merrill analysts said that sales from ML II saw bonds price at a one- to two-point premium to the rest of the market when the auctions started in April 2011. By June, pricing had widened and the sales were stopped.

Early in the first quarter of this year, after a rebound in prices, the NY Fed began to receive unsolicited bids for the remaining portions of the ML II holdings. The remaining bonds left in the vehicle were sold in three successive sales: two won by Credit Suisse and the other by Goldman Sachs.

"The demand for the products was strong, prices held up, and the NY Fed was able to make a $2.8 billion profit on the U.S. taxpayers' $19.5 billion loan," analysts said. "The successful sale of the remaining bonds in the ML II portfolio injected a sense of confidence in the market, as it proved that the market was priced at a level where it could successfully absorb excess supply."

 

Non-Agency Supply

The supply of seasoned prime RMBS is tight and well bid as "the new capital rules for RMBS that apply to U.S. banks (that does away with the ratings) will generally give capital relief to banks for lower-rated RMBS, provided there is sufficient credit support from the subordinate bonds," said a sell-side source.

This new dynamic can encourage banks to enter the bidding for lower-rated RMBS.

Redwood Trust, which in June issued a $405 million deal called Sequoia Mortgage Trust 2012-3, said that its deals have been met with very good demand as investors hunt for yield in a low-rate environment.

A July 26 prospectus filing with the Securities and Exchange Commission (SEC) indicates that the originator may be looking to bring its fourth deal this year, Sequoia Mortgage Trust 2012-4 to market. According to the SEC filing, Barclays Capital will underwrite the deal.

Springleaf Financial priced its follow-up to its April issue on July 31. The new $970.034 million deal called Mortgage Loan Trust 2012-2 is backed by seasoned first-lien fixed-rate and adjustable-rate, residential mortgage loans secured by one- to four-family residences, manufactured housing, land and packages of multiple real properties to subprime borrowers.

It's not just the non-agency space that's making use of the current market dynamics. BofA Merrill analysts said that today's low yield environment continues to offset broader market concerns in the consumer ABS space - a sentiment well supported by the uptick in subprime auto issuance this past month.

According to data provided in an Aug. 1 report by Wells Fargo Securities, issuance in subprime autos now stands at $10.6 billion year-to-date, increasing from $8.2 billion from the same time in 2011.

The sector is well on its way to surpassing last year's $12.6 billion. Standard & Poor's analysts said in a note on July 31 that they expect total issuance to reach $15 billion in 2012. Analysts also noted that auto loan ABS net losses for both the prime and subprime sectors were near the lowest levels over the last six years.

Interestingly, though, the subprime auto space is sporting a new look. Wells Fargo noted in its report that the two largest subprime auto ABS issuers, AmeriCredit Auto Receivables Trust and Santander Drive Auto Receivables Trust, which comprised 80% of the dollar volume of the total issuance in the last two years, have only accounted for 41% of the number of deals completed.

Instead, it's the micro subprime retail auto ABS deals that have filled a gap for investors looking to get a large pickup in spread when compared to the broader subprime auto ABS transactions, according to a Barclays Capital securitized products research report.

These deals from so-called micro- issuers also benefit from a conservative structure, with high levels of hard credit enhancement and significant excess spread. These factors allow the deals to maintain a strong price/yield profile under adverse stress scenarios. The dollar price on micro subprime retail auto ABS Class A holds up across even the most severe performance scenarios the bank analyzed, Barclays analysts said.

Micro-issuers of subprime retail auto securitization loans are defined in the report as first-time, less frequent or smaller issuers of subprime auto ABS.

Analysts said that issuers that fall into this category tapped the securitization markets with an inaugural transaction in 2009 and have followed on that issuance only sporadically in the past three years. Year-to-date, the micro-issuers account for about 10% of the total primary market volume in subprime retail auto loan ABS.

Since 2009, new-issue volume in the auto loan sector has totaled $33.4 billion. Of that, $29.6 billion is from the programmatic issuers. The remainder, with an exception of a one-off $1.4 billion transaction from CitiFinancial (CFAIT 2009-1), is fragmented among eight micro-issuers, analysts said.

They expect that some of the micro- issuers will grow their securitization platforms, while others will likely continue to bring new deals opportunistically.

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