In the wake of the devastation wrought by Hurricane Katrina, the question on most people's minds in the ABS market is how deals in some of the non-mortgage related ABS sectors will respond, and how badly the damage will affect deals in those sectors. Luckily, unlike in the Gulf coast region itself, it appears as if the ABS market will weather the storm.
In general, ABS researchers, such as those at JPMorgan Securities seem optimistic about the potential negative affects of the disaster on ABS deals. "In the overall ABS market, we believe the effects should be limited, given the small percentages of pools represented by the disaster areas," JPMorgan analysts wrote. One of the sectors that has the most exposure to the affected areas is the manufactured housing sector, the other, mostly through higher fuel prices, is autos.
Researchers with Lehman Brothers expect a short-term increase in total prepayments as insurance claims are paid and borrowers default. At the same time, Lehman sees a possible decline in severity rates as money from full-destruction claims typically covers the retail value of MH units, and not the wholesale value.
Lehman reports that GreenTree Financial transactions have 2.4% to 5.4% exposure to the areas affected by Katrina, as measured by Federal Emergency Management Agency zip codes.
As for some of the other large MH issuers, Lehman reports that Origen Financial has a total of 13.7% exposure to the Alabama, Florida, Louisiana and Mississippi areas. Based on the same ratio used to calculate Green Tree's exposure to the affected areas of those states, Lehman estimates 4.1% of Origen's portfolio is in the disaster area. Oakwood Homes has a total of 12.3% exposure to the four states, and also an estimated 4.1% of its portfolio in the affected areas. GreenPoint Finance has a 19.8% exposure to those states and a roughly 5.8% exposure to the affected areas.
The ABS research team at Morgan Stanley thinks the Katrina-related spike in fuel prices in the afflicted regions, as well as the general rise in fuel prices, will ultimately cause a slowdown in new vehicle sales, as well as an attempt by owners of large trucks and SUVs to sell and opt for more energy efficient vehicles.
For auto ABS, Morgan Stanley believes this will likely amount to higher prepayment speeds for deals with higher concentrations of trucks and SUVs, meaning generally those deals issued by the U.S. auto manufacturers.
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