Solitaire Funding did it; so did Grampian Funding and a list of other asset-backed commercial paper vehicles. After skeptical investors stopped buying recherche ABCP assets - namely those with arbitrage, extendible-note and market-value structures - some program sponsors turned to using repurchase agreements as backup liquidity.
Those vehicles are not the only ones that have relied on repurchase agreements, known as repos, for supplemental or alternative financing.
In its 10-K filing from Feb. 29, Thornburg Mortgage reminded the market that it sometimes used reverse repurchase agreements, among other sources of funding, to finance its ARM assets.
"We have established lines of credit and collateralized financing agreements with 13 different financial institutions," the company wrote, adding that it had "obtained committed Reverse Repurchase Agreement financing capacity of $2.25 billion that expires between March and June 2008."
The development is not surprising, either, as program sponsors had to put backup liquidity plans into effect, say market sources. Thornburg's last statement, however, about the mortgage lender's repo capacity expiring by June 2008, was jarring.
It raised an important question: How much longer can companies like Thornbug Mortgage, as well as ABCP vehicles such as Solitaire and Grampian turn to the repo market to finance their assets?
"What we've seen over the last several weeks - and accelerating with the Thornburg problem - is that the repo market itself has started to contract," said Lou Crandall, chief economist for Wrightson ICAP.
This contraction accelerated as dealers became more cautious about the sizes of their own balance sheets, and increased the haircuts charged to customers through prime brokerage operations, said Crandall.
Those close to the repo market say that volume had increased slightly from yearend 2007 levels. As of Feb. 20, the volume of standard repos stood at $2.9 trillion, an increase of about $400 billion since January 1, according to George Goncalves, chief Treasury and agency debt strategist at Morgan Stanley. Reverse repos amounted to about $1.2 trillion. Reverse repos are the type of repo funding that Thornburg mentioned in its SEC filing.
The Federal Reserve tracks output from the repo market and expected to update its numbers last Thursday, our press time. Crandall pointed out, that recorded repo volumes are expected to look drastically lower after that update. As high-quality GSE-backed MBS became harder to finance through an overloaded repo market, banks began looking to real money buyers for financing, which pushed mortgage rates substantially higher, said Crandall.
"The end of February was not a good time in that market," Crandall said.
From the perspective of securitization and certain products in the structured finance market, the contraction of the repo mirrors the recent and, as any one except investors might say, unsettling narrative of the credit markets. One market source compared current market conditions to the collapse of the oil industry in 1985.
"The entire bottom has come out," he said. "People are investing at next to nothing for Treasurys."
Meanwhile, spreads for ABCP shot up to Libor plus 15 or 20 basis points after nearly flattening out some three weeks ago, said that market source.
So where does that leave issuers, who need to get financings done despite market conditions? Here's one suggestion from those who have work through several credit cycles- club deals.
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