Citigroup Global Markets managed to claim the top position among U.S. ABS CDO managers, according to Thomson Financial, despite a recent announcement that the bank is facing losses on $1.3 billion in pretax subprime MBS collateral, CDO positions and leveraged loans warehoused for future CDOs.
For the first three quarters of 2007, Citigroup increased its issuance volume to $35.9 billion with 49 deals and a 14.6% market share. This is up from $27.1 billion with 47 deals and an 11.2% market share for the same period in 2006. But despite its top ranking, the bank did only 11 deals worth $5.3 billion in the third quarter, down from 14 deals worth $7.7 billion for the same period in 2006.
Merrill Lynch fell to second place for the first three quarters of 2007 from a first-place ranking in 2006. The bank churned out 40 deals with $32.5 billion in volume and a 13.2% market share, a slight drop in volume from the $34.6 billion the bank issued for the same period in 2006. Wachovia jumped one notch to third place in the first three quarters of 2007. The bank arranged 36 deals worth $19.5 billion and had a 7.9% market share. This was an increase from $17.1 billion in 2006 volume and a 7.1% market share, but it was a decline in total deals from the 41 transactions it churned out for the first three quarters of 2006.
Perhaps the biggest mover in the first three quarters was JPMorgan, which jumped to fourth place from 12th place the previous year. Though the bank put out the same number of deals as it did in the first three quarters of 2006, its volume rose to $15.6 billion with a 6.4% market share from $10.2 billion with a 4.2% market share in 2006. However, in a quarterly comparison with 2006, the bank dropped to issue only five deals worth $2.7 billion from 11 deals in 2006, totaling $5.7 billion.
Slower Issuance Pace
Not surprisingly, volume in the third quarter of 2007 dropped to $41.7 billion from $94.8 billion in 2006, according to Thomson Financial. On a monthly basis, U.S. ABS CDO volume has been declining since March 2007, when it topped out at $46.2 billion. It fell to a meager $6 billion in September 2007, according to global research firm Dealogic.
And market players do not expect issuance to pick up anytime soon. "I think the outlook remains pretty grim for ABS CDO issuance over the rest of the year," said Christian Stracke, senior strategist at CreditSights. UBS called potential CDO losses "the greatest ratings and credit risk management failure ever." The bank predicted that among 'BBB' tranches, 94% would default.
Indeed, with U.S. RMBS issuance declining, and delinquencies rising on previously issued loans, it is tough to see an imminent comeback in the sector. A boost in the new issuance of home equity ABS would not be critical to sustain the ABS CDO market, because the CDS market allows managers to reference already outstanding transactions. Given the poor performance of the 2006 vintage, however, it would be helpful, said Joseph Astorina, a director of securitization research at Barclays Capital.
Other market observers say that the sector would benefit from a pickup in RMBS issuance -- provided that the loans are of better quality.
"Whether and how much this market comes back is going to depend partly on RMBS issuance picking back up and partly on the performance of any new collateral," said Yuri Yoshizawa, a managing director at Moody's Investors Service. "While some of it has to do with the arbitrage that is involved in terms of making the deal work, a lot has to do with confidence in the structure as well as the collateral itself," she said. There has been an increased interest in higher-rated collateral, she said, as investors are looking further up the capital structures to single-A and double-A.
Liability spreads have also gapped out to vastly wide levels. Though some market players have argued that they have hit their limits, others think spreads still have room to grow. Indeed, while it is hard to comment on further spread widening in the ABS CDO market because of the significant amount of tiering, generally speaking, Astorina expects that there is probably more room for spreads to inch out, especially given expectations for further ratings actions on the RMBS side, and subprime RMBS in particular. "In the fourth quarter we would expect to see additional ratings actions on some of the subprime deals from the later half of 2006, and that could cause additional spread widening."
For the CLO market, the remainder of the year looks much brighter than the past quarter. In the third quarter, CLO issuance fell to $23.7 billion, or 60% of the second-quarter volume, which totaled $39.3 billion, Dealogic said.
"I would say that the CLO market was frozen and is now seeing some cracks in the ice," said Bill May, a managing director at Moody's. "I am getting on average four new CLOs a week. That does not mean those CLOs will close, but the bankers are trying."
The general repricing in the market has made the risk-reward balance more attractive, said CreditSight's Stracke. Deutsche Bank recently closed Genesis CLO 2007-1, a $2 billion quasi-static CLO composed of loans from several different warehouses the bank had opened. Credit Suisse also followed with a similarly structured deal closing last week.
"These banks are trying large, quasi-static CLOs to get rid of the overhang," May said. At the same time, some of the more plain vanilla CLOs have recently closed, including a $700 million transaction from Ares Management and a $750 million CLO from GoldenTree Asset Management. "If you have a CLO manager that is a repeat manager and has an investor following, a deal can be done," May said, noting that there is a good deal of transparency in the loan market.
"There is no such thing as a no-doc loan in corporate loans, and investors know this."
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