Driven by investors seeking additional yield in the face of falling benchmark rates, ABS new issues saw fairly significant widening last week in the time leading up to pricing. Each of the three major ABS issues offered last week had spreads at the wide end of talk and some priced significantly wider.
Matt Whalen in JPMorgan's ABS group cited a general lack of liquidity in the financial markets following Sept. 11 as well as the investor community seeking additional yield from new issuance. The important aspect though, according to Whalen, is that "deals are being priced and all of the paper being offered is being sold."
Jeff Uppermann, head of securitization for issuer Centex Corp. concurs, citing yield-hungry investors for pushing spreads wider on new issuance, saying that with the rapid decrease in underlying rates, "investors are more focused on yield than spread."
The offering that saw spreads widen the most was the Chase Funding Loan Acquisition Trust 2001-AD1 home-equity deal, which came in at $798 million. The 0.90-year A1 class priced at a level of 23 basis points over one-month Libor, moving out from talk of 18 to 20 over earlier in the week. But the tranches that felt the most pressure had average lives greater than five-years. Centex's Uppermann added that since the Fed rate cut was at the short-end of market expectations, " it hadn't been priced in at the long end of the curve." The five-year senior IA-4 tranche priced to yield 90 basis points over comparable swaps, out from talk of 80 to 80 over and the 8.95-year IA-5 piece widened to yield 120 basis points over versus initial talk of 105 to 110.
Centex, which sold $520 million of home-equity paper through Salomon, benefited from the slightly smaller size and structure that did not contain any classes with average lives greater than six years. However at the shorter end of the curve, yield spreads were in line with initial guidance, with two and three-year classes pricing at 61 and 62 basis points over comparable swaps respectively. The five-year A-4 class, talked in the low 80 basis points over swaps, priced at 90 over and the 5.79-year A-5 class moved from talk in the 110 basis point area to yield 115 basis points over swaps.
The largest deal of the week came from foreign captive Mitsubishi Motor Credit, selling $1.4 billion of a retail auto loan-backed deal through bookrunner JPMorgan. The third offering of the year from Mitsubishi offered floating-rate paper, bucked the trend of issuers locking in low fixed-interest rates.
Although there was some widening for Mitsubishi, the floating-rate coupons limited this effect to a basis point or two. At the short-end an attempt to come in at sub-Libor rates faltered, as the money-market tranche priced flat to 4ML and further out, widening was restrained. The one- and 3.5-year classes priced at the wide end of guidance while the two-year class moved to 25 basis points over one-month Libor, out from talk in the 23 area. The 2.36-year single-A tranche moved out 10 to price at 95 basis points over one-month Libor.
A home-equity deal from Morgan Stanley Dean Witter Capital I was still in the market as of press time, backed by Aames Financial-originated product, but at first glance it looks as though the hint had been taken, as the series 2001-AM1 offered floating-rate coupons more comparable to the widened CFLAT and Centex deals. Senior 2.62-year paper was talked in the 31 basis point area, double-As at 80 to 85 basis points, single-As at 130 basis points and triple-B notes were in the 220 basis point area, all over one-month Libor.