As China’s economic slowdown roils global equity and commodity markets for the third straight session, securitization investors have just one concern: whether the Federal Reserve will end its’ near-zero interest rate policy in September.
Spreads on many kinds of asset-backeds are at their widest levels of the year, but the price action is nothing like what is happening in the Dow and S&P 500 indexes, which plummeted nearly 5% in early trading Monday, but subsequently trimmed losses.
Take commercial mortgage bonds: After spending most of the year clearing at swaps plus 85 basis points and then moving up to swaps plus 105 basis points in late June, spreads on the super-senior tranches of new issue CMBS conduits blew out two weeks ago, according to Trepp.
The last CMBS to price was a $716 million deal from Wells Fargo and Societe General; the benchmark, super-senior, class A-4 notes of WFCM 2015-SG1, which are rated triple-A, were printed Tuesday at swaps plus 120 basis points
At the bottom of the capital stack, the deals’ triple-B minus rated D tranche priced at swaps plus 440 basis points.
Unclear if Other Shoe Has Dropped in CMBS Market
In a report published Monday, Trepp senior managing director Manus Clancy noted that “the selloff came prior to last week’s blow up for equities, so perhaps it was a precursor of things to come in other markets.”
Based on feedback that Clancy has received from both the buy side and the sell side, the damage was “modest.” But then secondary trading was extremely light, so there weren’t many prints’ to determine just how much widening was taking place among cash bonds, he wrote.
“It’s possible that a lot of the damage to CMBS came the week of August 10th and that CMBS was just early. With so many trading desks sparsely populated, it’s more likely that the CMBS market has some catching up to do. With new issuance drying up over the next two weeks and buyers and sellers retreating to the beaches and mountains, it could be some time before the market fully re-calibrates.”
Next month, the number of trading days will be truncated by both the Labor Day holiday Sept. 7 and Information Management Network’s annual ABS East conference in Miami Sept. 16-18.
“There’s supposed to be a bevy of issuance starting in September, and although pricing for recent deals are widening, issuance for trophy properties could be priced at more desirable levels given their status as well-performing properties,” Sean Barrie, a Trepp analyst, said in an interview with ASR.
Barclays’ analysts also think supply could weigh on the CMBS market next month. “There is considerable uncertainty whether the Federal Reserve will raise interest rates on Sept. 17 for the first time since 2006, and the potential volatility leading up to and after the announcement could make investors skittish when faced with the large amount of supply,” they stated in a report published Friday.
ABS Wider than 52 Weeks Ago
Uncertainty regarding the Fed’s policy on interest rate has also driven spreads wider across other kinds of asset backeds. One of the last deals of any kind to price was $1.75 billion prime auto loan securitization from Toyota Motor Credit, dubbed TAOT 2015-C.
The triple-A rated three-year notes pay 40 basis points over interpolated swaps; while that was in line with the previous prime auto ABS deal, from Honda American Motor, it is also the widest level that Toyota has seen since it re-entered the term ABS market in 2010, according to research published Friday by Bank of America Merrill Lynch.
On non-prime auto ABS side, Santander Consumer priced the senior two-year notes of SDART 2015-417 some 17 basis points wide of its previous transaction, completed in June and at the widest levels since its December 2012 deal. The notes, which are rated triple-A, pay 73 basis points over the Eurodollar synthetic forward curve. Likewise, the class B, C and D notes of the latest deal pay 30 basis points, 40 basis points and 25 basis points more than comparable tranches of the sponsor’s previous deal.
“Investors demanded wider spreads in structured products last week, reflecting market uncertainty,” Wells Fargo stated a report published Monday.
“The market is looking for the Fed to move and for economic growth and currency stabilization in China. Until then, demand for risk assets could remain weak, in our view.”
FFELP Selling off Amid Concerns About Possible Downgrades
Spreads for securitization of federally guaranteed student loans have also widened, but this primarily reflects concerns about expected downgrades by Fitch Ratings and Moody’s Investors Service. In a report published last week, BofAML said spreads for short-dated tranches (with terms between 1.3-years and 1.5-years) widened to 94 basis points in August from 41 basis points in July; intermediate dated tranches (with terms that range between 4-years to 5 years) widened to 153 basis points from 73 basis points; and spreads for tranches with terms of 5.8-years to 7-years widened by 72 basis points to 163 basis points.
Rating agencies are concerned that the rising number of students in extended repayment plans will result in some student loan backed securities not paying off by their legal final maturity dates. Not doing so would represent an event of default under securitization trust documents. Although the Department of Education guarantees up to 97% of principal and interest of FFELP loans, that only kicks in when a borrower defaults.
Moody’s has placed on review for downgrade 118 tranches in 70 deals, while Fitch has placed on watch negative, 62 tranches in 24 deals. Most of the securities involved were issued by SLM student loan trusts in 2007 and 2008.