Razor-thin yields on short coupons have prompted securitization professionals to sigh, complain and scratch their heads in recent months. The recently priced $790 million John Deere Owner Trust, however, prompted investors to demand wider spreads than initial guidance allowed.
It underscored growing buy-side intolerance for spreads that are too thin, even in these relatively lean years.
Secured by equipment leases, the notes on JDOT 2006-A originally offered investors guidance of - two basis points over the two-year swaps, and a single basis point over interpolated swaps between three and four years. Merrill Lynch, who co-lead the deal with Deutsche Bank and did the structuring, relied on historical benchmarks when it traded the equipment-backed notes over prime autos, said someone familiar with the situation. Last year's JDOT buyers went along with that strategy, but this year they were "unwilling to follow it down. They saw some sticker shock," a source said.
U.S. dollar swap spreads have fluctuated slightly, but noticeably in the last month, widening out by as much as seven and 10 basis points, respectively, for the four-year and two-year maturities just after JDOT priced. During the JDOT pricing, however, spreads were on a tightening trend.
"The tightening of swaps was a motivating factor to investor demand on more spread," said one professional familiar with the situation.
Eventually, investors got a coupon flat to swaps on the two-year tranche, and three basis points over the swaps on the 3.5-year piece. Although such numbers hardly constitute a windfall for investors, "spreads were wider than [Merrill] had expected, and John Deere was not happy about that," a source familiar with the deal said.
True enough, John Deere officials expected the deal to trade at last year's levels, said one sell-side source, but the notes still achieved some of the tightest pricing ever. Besides which, the collateral is sounder than prime autos, which fueled expectations of better pricing.
"Investors have had enough of minus-four; minus-four; minus-1 deals," said the source. "It's just very tough to sell short fixed-rate assets currently, given these tight nominal spreads."
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