August turned out to be a blisteringly dry month for the ABCP and structured investment vehicle (SIV) markets.
In its first week, mortgage REIT American Home Mortgage Investment Corp., declared bankruptcy, stopped taking mortgage applications and slashed its staff by 90%. When the capital market tides turned against the Melville, N.Y.-based lender, which specialized in interest-only ARMs, it also catalyzed the erosion of investor support to the ABCP market that had already gotten underway.
Following the bankruptcy announcement, Moody's Investors Service downgraded $138 million in variable-rate subordinated notes issued through American Home's Broadhollow Funding, and placed them on watch for another possible downgrade. Standard & Poor's put the triple-B ratings on the series 2004-A and 2005-A subordinated notes on CreditWatch with negative implications.
"Nobody renewed, so it went into extension right away," one market source said of Broadhollow Funding. Broadhollow was a single-seller extendable note (EN) warehouse ABCP program. Such vehicles were the bane of the short-term structured finance market's existence from August through yearend, because they got partial liquidity support from the market values of underlying securities.
The problem was that a period of flat or declining home price appreciation numbers as well as rising delinquencies and downgrades watered down the market values of subprime and other classes of RMBS. Investors withdrew support for all types of extendible-note ABCP programs to the point where light EN rollover pushed spreads out as far as one-month Libor plus 60 basis points in August - even if they were rated A1+' or P-1', according to market sources.
In the case of Broadhollow Funding, the subordinated notes benefited from market value swaps from four banks, including ABN AMRO and Bank of America.
The subordinated notes were especially susceptible to increased risk of declines in the market value because the swaps do not cover credit-related deterioration in the price of delinquent and defaulted loans.
The ABCP market's initial chaos started in the extendible note subsector, but quickly engulfed other innovative structures, until traditional multiseller ABCP programs began having trouble rolling new paper.
Since reaching a record high of about $1.2 billion in assets in July 2007, the ABCP market took a nosedive of 36%, or $423 billion, according to Fitch Ratings. As of Dec. 19, there was about $77 billion in ABCP.
Although Standard & Poor's gave the SIV market a vote of confidence in a research note that same month, that market has since seen a steady withering away of its outstandings. Even the Canadian ABCP market came under pressure, as investors shied away from buying paper issued by specialty finance companies.
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