In what is not likely to come as a huge surprise to CDO market participants - Fitch Ratings said last week that performance of recently issued deals can be expected to closely track that of the subprime mortgage market. As subprime mortgage lenders over the last several years scrambled to place a record number of borrowers into loans, so did CDO managers rushed to pack the subprime RMBS securities into deals.
The structured finance CDO sector has historically maintained a substantial exposure to the housing market, with 2000 and 2001 vintage deals carrying between 40% and 50% average exposure to the prime, subprime and manufactured housing sectors. However, subprime securities now dominate in an increasing number of deal portfolios. Exposure to subprime RMBS was about 58.6% across structured finance CDOs issued in 2005, compared with 53.1% in 2004 and only 25.7% in 2000; the average CDO portfolio exposure to the RMBS sector in general in 2005 was more than 80%, according to Fitch. "The shift in RMBS exposure has linked the performance profile of more recent vintage SF CDOs to track the performance of subprime RMBS sector rather than the manufactured housing, aircraft lease/loan and franchise loan sectors in the early vintage SF CDOs," Fitch wrote. Prime RMBS represented approximately 4.5% of the 2000 vintage and grew to about 23% of the 2004 and 2005 vintages, Fitch found. The rating agency predicted that a future slowdown in the U.S. housing market could lead to a subsequent lag in upgrades and prepayments for structured finance CDOs issued in 2004 and 2005.
While manufactured housing represented about 18% of 2000 vintage CDOs, that exposure had decreased to 2% by 2003, and less than 0.5% in 2005. And, although average ABS exposure exceeded 20% in the 2000 vintage, it has steadily declined to about 2.5% in the 2005 vintage. Exposures specifically to franchise loan, aircraft lease/loan and 12B-1 deals decreased to about 0.5% in the 2003 vintage from 12.5% in the 2000 vintage. Exposure to CMBS within this group was 6.7% in 2005, down from about 22.1% in 2000. Meanwhile, exposure to the CDO sector has grown to as much as 12.3% in recent deals, up from only 2% in 2000.
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