MGIC Investment Corp. and Radian Group were not the only stakeholders to lose confidence in the outlook for the subprime market last week. Across the entire consumer ABS spectrum, capital markets investors dug in their heels and held onto their cash so tightly that they virtually shut down the new-issuance ABS market last week.
Indeed, as of ASR's Thursday deadline, the last consumer ABS transaction to be completed was the Nissan Auto Lease Trust, 2007-A, which priced on Monday. Managed by Citigroup Global Markets and JPMorgan Securities, the deal priced largely within expectations. The short-term notes, taken up by money-market buyers, came in at Libor minus three basis points.
"I got nothing," one trader said. "There are issuers who are looking to do transactions. The issue is to get a deal done right now, you have to face a fair amount of execution risk."
Under normal circumstances, the Nissan issuance might have given the week an energetic kick-start, but its pricing occurred - finally - at the end of a long execution period.
"The Nissan Auto Lease is taking a lot longer than it normally does," one trader said last week. "It is still going great, but people just are being very cautious about where they put their money."
Buysider apprehensions were compounded by news from MGIC Investment and Radian, which announced that their investments in C-BASS could be worthless. Radian is in the process of acquiring MGIC, a deal that is slated to close in the third quarter.
Rising delinquencies and defaults among subprime mortgages forced lenders to make $300 million in margin calls on C-BASS's credit lines in late July. By press time, word circulated around the ABS market that the company was not able to meet demands on those calls, and that it was looking for more liquidity options.
The news prompted the company to pull its planned $642 million transaction. That was the prudent thing to do, rather than run the risk of spreads widening out too far and investors rushing to pull their orders for the bonds, according to market sources.
"They could not really do a deal with that kind of news," one market player said. "Investors would be unhappy about that."
"It had nothing to do with the actual bonds," said another professional. "It had more to do with the headline risk that was involved."
Pricing guidance was not available for the Series 2007-CB7, but a previous C- BASS transaction issued from the same shelf, Series 2007-CB6, saw its 0.90-year, triple-A' bonds price at widened levels of 12 basis points over one-month Libor. Two-year bonds with the same rating came in at 19 basis points over the same benchmark, and its four-year triple-B pieces priced at 700 basis points over.
The issuance slump continues to affect the reception of other consumer ABS assets.
"The new-issue market has pretty much come to a standstill," one observer said. "There is no new-issue activity, and lots of secondary selling is what we are seeing."
What the ABS market needs to right itself, said one market professional, is a period of stability in the general stock market and industry-specific indices. Early last week the ABX.HE.07-2 began another slow, steady decline, and although the index made slight gains by midweek, it was still trending downward. The CDX, too, has turned in volatile performances.
"What we need is a couple of top-tier, high-quality issuers to bring a couple of deals to market," the observer said. Unfortunately, they would have to take the brunt of the current market slump, because "they are not going to have as much price discipline as they would prefer."
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