Investors were pleasantly surprised by the hidden value they discovered in the asset-backed securities market last week, when a $649.7 million Ambac Assurance Corp.-wrapped home-equity transaction from Advanta Corp. priced at surprisingly cheap spreads.
"This is the best value I've seen in this market in many years," said Michael Hoeh, head portfolio manager at Dreyfus Corp. "I don't think I've seen anything price that cheap in a while for fundamentally very attractive securities."
From a cross-sector relative-value perspective, the deal priced phenomenally cheap. An eight-year, triple-A-rated wrapped piece priced at Swaps plus 123, while a five-year, triple-A piece stood at Swaps plus 90. If the deal is compared with the five-year piece of last week's single-asset commercial mortgage-backed securities deal, 1301 Avenue of the Americas Trust 2000-1301, an investor would have had to buy the triple-B piece of that deal to get the same type of spread achieved in the triple-A piece of the Advanta deal.
"And they all priced at discount-dollar prices, so the pricing on this one is a surprise," Hoeh said.
This surprise comes at a time when Advanta, which Hoeh describes as "somewhat of a bank-regulated entity," is looking at the sale of its mortgage division. Therefore, there may be some hesitance on the part of investors due to some of the headline risk associated with the company. Even still, however, the pricing of this Advanta deal is cheap even compared to paper from Green Tree Financial (now Conseco Finance), which is certainly perceived to have more headline risk.
"The fact that some people are not seeing the good quality of these securities when they are wrapped to a triple-A level is a little shocking," Hoeh noted. "And the syndicate on the Advanta deal was made up of Bear, Stearns & Co. and Morgan Stanley Dean Witter, who are very involved asset-backed players. People are so shy about anything with any potential headline risk."
For the Advanta deal, the trust is utilizing a pass-through structure, and Advanta will retain the servicing and customer relationships of the mortgage loans.
Meanwhile, credit cards and autos made up most of last week's supply, as the market was still craving short, floating-rate product. This is even more true now that two- to 10-year swap spreads moved in approximately eight basis points in two weeks time, according to ABS Firstlook, Banc of America Securities' daily commentary.
"In short, the compensation investors are paid to move out in maturity has been cut in half," writes Meredith Hill, head of ABS research at BofA.
Most market players expect the Federal Open Market Committee - which meets this Tuesday - to keep interest rates steady. This news has continued to have a positive impact on the market, sources said.
In addition to its home-equity deal, Advanta priced the long-awaited, public debut of its small business credit card line. The three-part, all floating-rate deal was managed by Salomon Smith Barney, and included a double-B-rated C-class tranche. - AT/MG