All was quiet on the issuance front in the asset-backed market last week, but the Federal Open Market Committee's rate cut and headline risk associated with the state of the California power companies created a mixed tone to the market.
"Typically in that environment, trading slows, almost grinds to a halt. Now you're seeing people come back in," said Jeff Salmon, director of ABS research at Barclays Capital. "When we did see buyers start to tip-toe back in, there seemed to be good demand for short fixed-rate paper. Three-years and in seemed to be fairly catching a good bid."
"There's enough uncertainty that it will make it attractive to invest in asset-backeds," added Russell Hurst, director, asset-backed research at First Union. "Asset-backeds are still being viewed as a relatively safe haven compared to other sectors of the market now."
Fixed-rate seven- and 10-year paper is currently being viewed as issuers' paper of choice given the current rate environment.
While the pipeline is currently dry, the rate environment could get deals going as early as this week. "We feel like there's going to be a lot of volume in the first quarter," Hurst said.
Citibank has filed a $12 billion shelf with the Securities & Exchange Commission for its 2001 issuance, but has not stated when it plans its first issuance.
The auto sector could also pick up shortly, as the Big Three auto companies, Ford Motor Co. and DaimlerChrysler AG in particular, are finding it too costly to seek funding in the corporate market.
"The asset-backed market will probably be a nice issuing vehicle for them starting in the first half of this year in particular," Salmon said.
Utility woes in California are causing outstanding rate-reduction bond spreads to widen to about 25 basis points over credit cards, Hurst said.
However, that is mainly as a result of headline risk as opposed to a credit risk.
With the California utilities commission granting a 10% rate increase last week, it could set the companies, Southern California Edison and Pacific Gas & Electric, on a fast path toward additional securitization.
"It looks like securitization might be the godsend or bailout plan for these," Salmon said. "They need to get some plan in place that would allow them to issue."
Issuance in the utility sector was expected to be between $8 billion and $10 billion this year, but that could all be dampened depending on what happens in California. But observers say the bonds are still good.
"A lot of people will come back into the market," Hurst added. "There's a lot of price discovery going on."
