Non-agency re-remic activity has increased since the beginning of the year, according to a Barclays Capital research report.
It currently serves as the securitization markets primary mechanism to increase credit leverage in the absence of the Term ABS Loan Facility or TALF and has provided substantial support to RMBS prices, Barclays analysts said.
The report also stated that while most earlier re-remics were done in the prime space, increased activity in this sector is starting to be seen in dented prime/Alt-A securities as well.
According to the report, re-remic has seen an emergence of two major investor groups.
The first is banks, money managers and insurance companies, where investors looking for principal and downgrade protection are interested in the super senior portion of the re-remic trade.
The second group is hedge funds and private equity investors, where the credit-risk-leveraged mezzanine portion of the re-remic appeals to buyers looking to express a view on bond performance.
The report had three overall conclusions regarding the sector.
The first is that re-remic super senior triple-As at a 7% to 9% loss-adjusted yield compare very favorably with consumer ABS triple-As, CMBS triple-As and high grade corporates.
Re-remics do not completely eliminate credit risk. However, for their second point, Barclays analysts said higher subordination and the current availability of increased data to back models give greater confidence in the ability of new triple-As to withstand losses. Additionally, transparency and liquidity, while still a cause for concern, have improved modestly.
The third point was that the mezzanine bonds return profile is more option-like, with significant potential upside in positive-performance scenarios. However, there is commensurate downside risk if performance is worse than expected. These bonds are more suited to investors who assume credit risk, analysts said, pointing out that selecting the right securities is key.
