The ABS market suffered another week of silence as new issuance remained virtually non-existent and trading continued to slow.
ABS traders expressed a sense of frustration at the stalled market conditions, without holding out much hope for a near-term recovery. This is despite the initial uptick in the stock market on news of a new presidential regime.
As the government's troubled asset relief program (TARP) continues to unfold, there is still no clarity regarding the values of affected securities, one trader said, which is delaying a comeback in the ABS sector.
Secondary activity remains focused on short-dated, triple-A rated consumer ABS, Merrill Lynch noted in a report last week. However, even these markets remain light, according to market participants.
The rating agencies released a series of reports predicting more doom and gloom for consumer ABS assets.
Credit metrics will continue to deteriorate in 4Q08 and into 2009, with some issuers surpassing historical loss peaks before 2009 is over, Fitch Ratings analysts said in a recent report.
Higher U.S. credit card portfolio losses will come from rising job losses and volatile energy prices, and the absence of refinancing options like low-rate balance transfers and home equity loans means a higher proportion of delinquent accounts, the rating agency said.
Curt Beaudouin, vice president at Moody's Investors Service, predicted "severe stress" on the auto ABS side. Auto financing remains difficult for banks to get done, and with no buyers for the auto businesses, it will be hard for the banks involved to exit the market - something that they have expressed interest in doing, Beaudouin said. As a result, banks are withdrawing from the business by slowing originations and winding down portfolios, he said.
On the upside, auto finance exposure is not a leading negative rating driver, given the auto firms' diversified asset and earnings bases.
The combined Wells Fargo and Wachovia company is the most active in the sector in dollar terms - about $55 billion - and make up a "relatively moderate" 5.9% of total loans, Moody's said. Other big players are JPMorgan Chase, Capital One, and Citigroup.
Moody's also laid a hit on Ambac Financial Group (Ambac) last week, downgrading the rating of its subsidiary Ambac Assurance Corp. to 'Baa1' from 'Aa3', with a developing outlook.
David W. Wallis, president and chief executive officer of Ambac, attributed the downgrade to the company's earning announcement and not an analysis of Ambac's portfolio.
The company posted a $2.4 billion net loss in the third quarter, primarily because of mark-to-market losses on credit derivatives - which were a whopping $2.7 billion - increased loss provisioning primarily related to second-lien RMBS insurance transactions, and market losses on RMBS within the financial services investment portfolio.
Ambac also announced it would be delaying a planned $850 million capital injection into Everspan Financial Guaranty Corp., its recently reactivated stand alone public finance business formerly known as Connie Lee Insurance Co. The company said it will wait on a ratings update on Ambac Assurance Corp. from the rating agencies before it proceeds with its municipal business.
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