This is getting to be a habit. The ABS market remained in a resting state for the third week last week, getting little encouragement from gun-shy investors and with the overall credit market getting only slightly more sympathy from the Federal Reserve.
Capital One eked out the ABS market's only signifacant deal, a $1 billion dropshot whose three-year tranche priced at seven basis points over the one-month Libor. Secured by credit card receivables, the deal had just one tranche, rated triple-A by all four rating agencies. Barclays Capital, Banc of America Securities and JPMorgan Securities were among the underwriters.
According to Wachovia Securities, that level is representative of triple-A spreads that have not been seen in more than four years. Taking its analysis further, Wachovia said that spread differentials between fixed-rate three-year, triple-A auto debt and similarly rated credit card bonds are historically wide, at nine basis points. That spread difference, however, should be short lived, the bank said.
"The pace of new issuance seems to be about one deal every 10 days, and they are more esoteric as they come out," one market professional said.
Although new issuance remained scarce, word circulated of a possible issuance from RFMS II, secured by second-lien mortgages, yet carrying a monoline wrap to help entice market-wary investors.
In the meantime, Wachovia recommended that investors try trading in the secondary market to find value - provided that they do thorough due diligence on credit and prepayment. Yet the secondary market seemed eerily quiet as well, according to one market professional.
"The secondary market actually seems a little slower to me than the past couple of weeks," she said.
Even the fast-moving, short-term ABCP market was pulled into the turbulence, and much of that was attributed to instability among conduits that issue extendible notes, specifically mortgage warehouse structures (see story page 9). Around $38 billion to $43 billion of RMBS and CDO tranches could be liquidated from ABCP conduits, SIVs and SIV-lites if all nonbank sponsored programs were forced to wind down, according to Bear Stearns. Mortgage warehouse loan liquidations from extendible conduits are expected to be approximately $40 billion, according to the bank, although it noted an important caveat: Those mortgage loans would have come to market as new securitizations anyway and should not be thought of as incremental net supply.
By late last week, the broad ABCP market showed signs of normalizing, but tactics by the European Central Bank to loan banks $130 billion in overnight funds destabilized the market anew.
The credit markets saw the ECB's move as a confirmation of their worst fears of liquidity, according to press reports and market sources. On Friday morning, the one-month Libor widened by 19 basis points, one market professional reported.
"That is a big move, and it was a bit unexpected," said one market professional late last week. "That is what kicked off today's turmoil."
The Federal Reserve followed the ECB's example, by putting $12 billion into the U.S. banking market to help free up liquidity, according to press reports.
Whatever liquidity is being released into the ABS market seems to be coming from long-established participants, such as insurance companies and traditional money managers, one market source said. Many of the levered players appear to have been pushed onto the sidelines because of the recent rash of lender margin calls on issuers.
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