The ABS market suffered yet another week of frozen new issuance and paltry trading activity in the secondary market.
Hopes of pricing clarity for illiquid assets were quashed when Treasury Secretary Henry Paulson made the announcement that he would not be implementing the troubled asset purchase program as previously expected.
On news of the announcement, the ABX-HE-AAA 07-2 dropped to close Wednesday at 36.67, a record low for the index.
No new deal flow is expected in the near future. Market participants last week could not make predictions on when we might see the market come back, but things are not looking good for the rest of 2008, one ABS market player said.
Much of the focus last week was on the capital infusions taking place under the newly revised Troubled Assets Relief Program (TARP). Right before press time, CIT Group announced that it had applied to be a bank holding company so that it would have access to the Treasury's $250 billion capital purchase program.
But while new capital may stabilize a decline in lending, current economic conditions are not helping consumer credit performance. The Merrill Lynch economic team's forecast of 8.3% unemployment by the end of 2009, with a 100% correlation between the unemployment rate and credit card charge-offs, would mean the industry may see the charge-off rate move from approximately 6.6% (as reported by Fitch Ratings) to almost 8.5%, Merrill fixed income analysts said in a report last week.
Bad news also came from the Trust Preferred (TruPS) CDO sector. Moody's Investors Service downgraded 180 tranches across 44 TruPS CDOs, while 88 tranches remain on review for further possible downgrade. Moody's said that these ratings assume there will be zero recovery on the 31 bank trust preferred securities that are currently deferring interest payment, and zero recovery on the 10 banks that were closed by their regulator in these TruPS CDOs.
While the TARP program will be a positive for the U.S. banking sector, "it may not be sufficient to prevent further deferral of interest payments on their trust preferred securities and defaults for some of the weaker banks in TruPs CDOs," Moody's said.
Meanwhile, in the CLO secondary market, there has been liquidity at the top of the capital structure as selling pressure returns, said JPMorgan Securities analysts in a report last week. The bank analysts said they expect more liquidation and selling to take place toward the end of the year, with continued pressure from the leveraged loan market sell-off.
On secondary spreads, triple-A to single-A paper remained unchanged at 525 basis points, 1000 basis points and 1400 basis points, respectively, while triple-B and double-B paper widened by 200 basis points to 2200 basis points and 3200 basis points, respectively, the analysts said. The month of October is considered so far to be "possibly the worst month in leveraged loan market history, at least in the context of mark-to-market losses," JPMorgan analysts said.
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