Some of the most talked-about securitizations did not make it to market during the month of February.
Ratings agencies have received a number of proposals for private-label residential mortgage backed securities (RMBS) and they apparently do not like what they see. Analysts at both Fitch Ratings and Moody’s Investors Service issued special reports late in the month saying the credit quality of certain deals that have passed through their hands leaves something to be desired.
The culprit? The representations and warranties as to the condition of loans, the subject of so much litigation between sponsors and investors in legacy deals. The ratings agencies say the reps and warranties underlying the structures of proposed RMBS are weaker than the ones animating the deals issued by Redwood Trust off its Sequoia Mortgage Trust Shelf.
Fitch fired the first shot Feb. 20. The agency warned that the reps & warranties embedded in recent deal proposals may expose investors to sharper risks from poor underwriting as well as “defective” mortgages.
Where possible, additional credit enhancement would be needed to offset these added risks, the agency said.
Deals at Risk from ‘Defective’ Mortgages
Fitch didn’t name any names, but there has been much talk about at least two major banks, JP Morgan and Bank of America, as well as additional real estate investment trusts (REITS) approaching the market.
Fitch said a rep and warranty framework established by the American Securitization Forum, and present in all the Redwoods deals to date, “reflects a high standard that provides the most assurances about loan origination and underwriting quality.” These reps contain few knowledge qualifiers, the repurchase obligations are for the life of the loan, and there is little ambiguity.
But new proposals contain provisions that Fitch deems flawed. One, for instance, lets lenders off the hook for buying back defective loans after the first 36 months.
Moody’s joined its peer on Feb. 25, and offered a specific ceiling for deals with two or more weaknesses in their rep and warranty frameworks: ‘A1 (sf).’
The agency said deals would face that ratings cap if they had narrow pre-securitization due diligence, limited obligations from the lender to buy back defective loans, and misaligned interests between the sponsor and investors,
One particular problem Moody’s cited was broad materiality standards. This would reduce the likelihood that a borrower would buyback a flawed loan. As an example, under such an approach, a loan that was incorrectly assigned an loan-to-value (LTV) of 60% because of a faulty appraisal process could remain in the pool, provided its LTV didn’t rise above the 80% stipulated by the structure. This would not be consistent with a triple-A under Moody’s criteria.
The agency added that, if transactions failed to meet only one of the criteria for a top notch rep and warranty framework, it could potentially achieve up to a ‘Aa1 (sf)’ rating.
As of press time, Standard & Poor’s had not chimed in. Perhaps that’s not surprising, because, in late November, S&P gave triple-A to the senior tranches of a $329.9 million private-label RMBS deal sponsored by Credit Suisse that set limits, also known as “sunset provisions,” on the amount of time investors in the deal have to make claims that loans used as collateral do not meet stated underwriting criteria Additionally, the deal, CSMC Trust 2012-CIM3 (CIM3), contains language intended to clarify what constitutes a breach of representations and warranties of the underwriting criteria.
S&P said in a special report issued Dec. 3 that the CIM3 transaction is the first of what it expects will be many non-agency examples of the effort to provide greater clarity around the issues.
“The RMBS market has attempted to balance the interests of investors and issuers while providing clear guidelines to all participants involved in the securitization process,” the agency said.
S&P noted that the Federal Housing Finance Agency (FHFA) recognizes both the need to offer the market certainty about the transfer of risk to the private market as well as the negative effect the GSEs’ own repurchase demands can have in that process.
Demand for Consumer ABS Still Outpaces Supply
Investor sentiment remained firm across all sectors of the securitization market in February. For investors looking to pick up some extra yield on pricing spreads, off-the sectors like auto dealer floorplan ABS and private label credit cards offered some opportunity.
Dealer floorplan deals picked up the pace with over $3 billion of issuance during the month that priced to good investor demand. These deals are structured as revolving trusts; they finance inventory for the dealers of large manufacturing companies.
The busy month means this asset class is on track to exceed $10 billion of primary issuance volume this year, according to S&Ps. Floorplan deals account for 21% of the approximate $19 billion of total ABS primary issuance volume this year, compared with 14% a year earlier, said analysts at Bank of American Merrill Lynch in a Feb. 22, report.
Busy Month for Dealer Floorplan Financing
Citigroup’s projections are even more bullish: analysts expect $15 billion of dealer floorplan ABS issuance this year, a 7% increase from last year, according to a Feb. 21 report.
Dealer floorplan issuance spiked to roughly $14 billion from 17 deals in 2012. In 2011 and 2010 the total for the sector was $7.1 billion and $7.7 billion from 10 transactions, respectively. Outstanding dealer floorplan ABS is a roughly $30 billion market.
Issuance volumes for this asset class have been boosted by strong auto sales and the refinancing of maturing transactions. More than 1.2 million new vehicles were estimated to have been sold over last month, a 4.3% increase over last year, according to Edmunds.com. For 2013, the equity research group covering auto companies for BofAML expects new vehicle sales to reach 15.7 million units. Over 75% of auto dealers’ inventory stays on their lots for less than three months, with only 9–12% taking more than six months to turnover, according to latest master trust prospectuses, said Citigroup.
BofAML said the low cost of ABS funding relative to on balance-sheet funding is another factor driving issuance last month.
Nissan issued a $1 billion transaction on Feb. 20 that was upsized from $600 million under its Nissan Master Owner Trust Receivables dealer floorplan structure; to levels that came inside of pricing seen on Ford’s $1.7 billion, Ford Credit Floorplan Master Owner Trust A Series 2013-1.
Nissan’s deal, Series 2013-A priced its Moody’s Investors Service and Fitch Ratings, ‘Aaa’/ ‘AAA’, 2.96-year notes at 30 basis points over the one month Libor. The deal was co-lead managed by BofA Merrill Lynch, JP Morgan and RBC Capital Markets.
Ford priced its deal’s 2.98-year, ‘AAA’, floating rate at 38 basis points over the one-month Libor and the fixed rate notes were priced at 38 basis points over Interpolated Libor at the end of January. Barclays Capital, Citigroup, HSBC and RBC co-lead managed the deal.
World Omni Financial Corp. also issued its $350 million, Series 2013-1 transaction that was rated by Moody’s and Fitch on Feb. 20 inside of Ford pricing levels. The ‘Aaa’/ ‘AAA’, 2.96-year, floating- rate notes priced at 35 basis points over the one-month Libor. Barclays is lead manager on the deal, which is the fifth series issued by World Omni Financial Corp and the first series rated by Fitch.
Earlier in the month, Ally Bank upsized its dealer floorplan offering, to $1 billion from $500 million. The deal, Series 2013-1, priced its 2.98-year, triple-A floating rate asset backed notes at a wider level, 45 basis points. Credit Suisse, JP Morgan and RBC Capital Markets were lead underwriters on the Ally deal.
Navistar kicked off dealer floorplan activity with its early February issuance of a $200 million deal, which issued a triple-B rated tranche for the first time. Navistar priced its 1.95-year, triple-A notes at 67 basis points; 1.95-year, double-A notes at 100 basis points; 1.95-year, single-A notes at 150 basis points and its 1.95-year, triple-B notes at 225 basis points.
Private label credit cards also offered ABS investors another place to pick up extra yield. World Financial Network issued the first deal of the year during the week ending Feb. 15. The senior, five-year, fixed –rate tranche of the $500 million deal priced at 60 basis points over Interpolated Swaps.
Private-Label Credit Cards Offer Yield Pickup
According to Nomura analysts, pricing on this deal was “significantly tighter” than the issuer’s previous five-year deal, which priced at 90 basis points in July 2012. Nevertheless, the latest deal still offered investors some spread pick up when compared with prime names issuing credit ABS in February. Barclays Capital and RBC Capital Markets join JP Morgan as co-lead managers on the deal.
For example, JP Morgan priced the five-year, ‘AAA’-rated notes issued under its $750 million 2013-A1 structure at 27 basis points over Interpolated Swaps. The bank also priced $1.15 billion of 1.98-year, floating rate ‘AAA’ notes at 10 basis points over the one-month Libor.
Discover Bank priced its five-year floating rate, ‘AAA’-rated notes the week ending Feb. 8, at 30 basis points over the one-month Libor. The deal’s three-year, ‘AAA’-rated notes priced at 15 basis points over Interpolated Swaps. Bank of America Merrill Lynch, JP Morgan, RBC Capital Markets, Barclays Capital and Citigroup were the lead underwriters on the deals.
In May 2012, the last five-year floaters issued by Discover under DCENT 2012-A4 priced 10 basis points wider than CHAIT 2012-A2 (5-year WAL). “As the hunt for yield continues, tiering across issuers has significantly reduced in the prime credit card sector,” said Nomura analysts in their Feb. 15 report.