ABS market trading remained woefully slow last week, according to traders, who said they expected this pace to continue at least until Labor Day.
While post-July 4 primary and secondary market activity is usually slow, this particular slowdown had "100% to do with the currently depressed market environment," one ABS trader said. Part of the lull last week stemmed from market jitters about Fannie Mae and Freddie Mac. A Lehman Brothers report on Monday suggesting the GSEs might need to raise additional capital because of an accounting rule sent shares tumbling throughout the week.
On Wednesday, former St. Louis Federal Reserve Bank President William Poole was quoted by Bloomberg as saying that the GSEs were "insolvent" and might need a government bailout. In trading that day, Freddie Mac dropped 24%, to $10.26, while Fannie Mae fell 13%, to $15.31. These are the lowest levels for both these agencies since 1992, reports said.
Rubbing salt on their wounds, UBS analysts on Thursday cut its price target on Freddie Mac to $10 from $28, pushing credit default swaps further out.
Five-year credit default swaps on Fannie Mae widened out five basis points to nearly 82 basis points and Freddie Mac swaps widened by about two basis points to about 82 basis points on Thursday, according to reports.
In Congress on Thursday, Treasury Secretary Henry Paulson maintained that these companies have sufficient capital to work through the current economic challenges, but ABS market participants did not appear convinced.
Market participants have also expressed fears of rising corporate defaults, which seem more and more likely as economic troubles persist, another ABS trader said.
ABS spreads tightened in May and remained at these tighter levels through the middle of June, but then mounting headline risk caused the levels to gap out again at the end of the month and in the beginning of July.
On the auto ABS side, where rising fuel costs and car prices threaten existing performance as well as new issuance, triple-A prime auto spreads widened 10 basis points in June, according to Deutsche Bank Securities' Securitization Monthly report for July. Two- and three-year paper ended the month at 80 basis points and 105 basis points over swaps, respectively, the bank said.
The lack of deal flow is evidence of pervasive market fears. Only two new deals circulated the market last week, according to the ASR Scorecards database. This was not enough to detect trends in issuance (except the lack thereof).
In the pipeline is a $768 million student loan securitization for Access Group, Access Group Student Loan Trust 2008-1, via Deutsche Bank Securities and Credit Suisse.
As of press time, pricing was not available on the transaction. The deal is backed by FFELP Stafford and PLUS student loan collateral and is reinsured for at least 97% of the principal and accrued interest by the U.S. Department of Education, according to a presale report from Fitch Ratings. Access Group and the Kentucky Higher Education Student Loan Corp. will service the transaction.
Also circulating the market was Bank of America Credit Card Trust Class A 2008-8, a $1 billion credit card securitization led by Banc of America Securities. Co-managers on the deal are Deutsche Bank, RBS Greenwich Capital and Credit Suisse. The single-tranche triple-A rated deal has a seven-year average life and was slated to close on July 17.
Just before the July 4 holiday, Banc of America Securities priced $250 million in Bank of America Credit Card Trust Class C 2008-4 notes. The single-tranche deal came to market with a triple-B rating and a one-year average life. Spread was at 325 basis points over one-month Libor.
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