With the slowdown in new issue ABS supply ahead of quarter-end, secondary trading - particularly for higher-yielding alternatives - picked up significantly last week. At least one bid list per day circulated from both smart-money profit takers and forced sellers, sources reported. Most of the bonds to hit the street, noted sources, were backed by manufactured housing.
Clearing levels for the various bonds were described as "sloppy," although many of the high-coupon bonds traded at a premium. The bonds most prevalent throughout last week were A3 and A4 senior classes of notes issued by Conseco Finance Corp., which made up one bid list last Wednesday that totaled "a couple hundred million," investors said.
Despite the troubles of the sector, MH is in the midst of rebounding. Although not all bonds put out for bid last week traded, a healthy amount changed hands. A pair of blocks of Conseco Finance series 2000-1 7.62% coupon A4 class bonds, rated B2 by Moody's Investor Service, changed hands at 103.875 and 102.9375, respectively. Upon new issue, CNF 2000-1 A4 bonds initially were rated triple-A by both Fitch Ratings and Moody's Investors Service, with a five-year average life.
"This was out for one of two motives," said one investor who passed on the trade. "It's either a forced seller - Moody's cut this bond's rating to B2' from A1' in January - or someone who just thinks the bid is rich, a smart-money account," he added. Fitch cut its ratings on the 2000-1 A4 bonds in January as well, to its current A' from AA-'.
The abundant supply of MH bonds did not surprise many, due to the lack of yield available in more vanilla sectors of the market, with more sophisticated investors turning anywhere possible for respectable rates of return. For example, despite the current ratings and potential likelihood of a principal loss in the aforementioned CFN 2000-1 A4 trades, the 7.62% coupon was credited with being enticing enough, given the current alternatives.
"The issue is that everything right now is tight," said one hedge fund manager. "Investors have changed their assumptions to justify a certain yield return."
In addition to the general richness of most ABS sectors, recent developments in the sector have fostered trading. On March 8, Standard & Poor's downgraded 66 classes of MH ABS issued by Oakwood Homes, some classes up to three notches. On March 25, Moody's Investors Service downgraded 104 classes of Oakwood MH ABS. Both agencies cited deteriorating performance and the potential for increased loss severities.
A number of classes, such as the Oakwood series 1999-B A4, saw the ratings cut from investment grade to junk status from both Moody's and S&P, reportedly prompting some insurance companies into a forced seller role.
By contrast, much of the Conseco paper was put out by profit seekers. "MH paper has been well bid since last fall," another investor said. "And if someone can cash in on a senior bond they bought last year, backed by recently modified loans that will likely extend, it's time to put them out for bid."
A report on the MH sector released in late March by Fitch estimates that 31% of Conseco MH bonds have extended due to modified loan agreements made to make the loans current, preventing them from becoming chargeoffs - for now.
Noting that the delinquencies and repos within the Conseco portfolio have stabilized, Fitch believes these statistics to be potentially misleading. "Losses on CFC's transactions have been relatively low compared to those for other issuers [but] Fitch attributes the relatively low losses partly to the company's use of extensions, which may reflect more favorably on performance than is actually the case," Fitch analyst Janine Fitter pens in the report, titled Manufactured Housing: Waiting for the Rebound.
"Once a loan is extended, it is marked current. Whether extending a loan or repossession is the more prudent approach to servicing remains to be seen, and Fitch expects the use of modifications to increase the percentage of subperforming assets in a pool, which would result in a greater percentage of losses occurring later in the life of the transaction," Fitter summarizes.