ABS transactions wrapped by bond insurer MBIA saw only mild spread widening in the secondary market last week, according to sources. The Armonk, N.Y.-based bond insurer received a second round of subpoenas last week from the Securities and Exchange Commission and the New York Attorney General's Office regarding a number of topics, including reinsurance contracts and credit default swaps on the company's corporate debt.
Sources from one ABS trading desk said there had been little trading in any MBIA-wrapped deals, and where there was, the spread change was negligible. The suggested bid would be three to five basis points wider than usual for MBIA-wrapped home equity ABS, said one trader.
"People are nervous, but nothing has really happened yet," said the trader. He pointed out that the real test would be to see where MBIA-wrapped new issues price from this point, but there had been none as of press time.
Gyan Sinha, head of ABS research at Bear Stearns, said spreads widened two to five basis points on MBIA-wrapped home equity ABS.
"Much of this is being driven by event risk issues. It is really the fear of the unknown, rather than the fact that you actually know something," said Sinha.
Bear Stearns created a matrix that links the widening in the spreads of MBIA's credit default swaps with the expected widening in the home equity ABS it wraps.
Before the negative headlines, says Bear Stearns, three-year MBIA-wrapped triple-A home equity ABS floaters were trading around 20 basis points over Libor and MBIA five-year credit default swaps were trading around 30 basis points. Default swap spreads widened to 85 basis points at one point during the previous week, but settled in around 50 basis points last week.
Bear Stearns initially estimated a widening of five basis points for the wrapped home equity ABS, given that level of default swap widening.
So far, a downgrade of MBIA's corporate debt rating seems highly unlikely, even in the face of the information requests. "A downgrade to a monoline [insurer] would be an extremely serious thing and it is not something the rating agency would do lightly," said one head of ABS research at an investment bank.
MBIA insures nearly $370 billion in bonds, most of them municipal bonds, and a downgrade would cause mass downgrades of the bonds it insures, and a cascade of selling.
In 2004, MBIA wrapped $15 billion worth of ABS transactions, mostly home equity ABS, from issuers such as General Motors Acceptance Corp., Wachovia Bank, Capital One Financial and Countrywide Home Loans Inc. MBIA wrapped deals represented 2.6% of the market last year, a steady decline from 4.9% in 2002.
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