Pricing guidance on auto and credit card transactions became more snug last week, as a pronounced liquidity dearth all but forced the RMBS-driven securitization market into a hiatus.
For the past couples of weeks, all three rating agencies have been making a series of refinements to their methodologies for various sub-sectors of residential mortgage-backed securities, contributing to the sluggish number of offerings from that sector during the same period, as one trader put it.
"There is a lot of waiting for the rating agencies to come out with their updated methodologies," he said. "That kind of delayed everything."
Guidance on the meager amounts of MBS deals that did come to market saw their spreads swell to triple-digit levels, in some cases, underscoring weak investor demand for the scratch & dent, second lien and home-equity-loan securities deals being offered.
The $90 million Washington Mutual Asset-Backed Certificates saw its triple-A-rated tranche being talked at 45 basis points over the one-month Libor, while a single-A tranche saw its bonds talk at around 200 basis points over the same benchmark.
Liquidity challenges are also keeping issuance in check for the mortgage sector, said the trader. Those issues, it seems, are not going away anytime soon.
The Bear Stearns Second - Lien Trust, at $36 million, had more negative news to contend with than other deals. Not only is it backed by second-lien collateral, an asset class that in recent weeks withstood intense and often negative scrutiny from the rating agencies, but its sponsor's parent company, Bear Stearns, announced that the net value of its High-Grade Structured Credit Strategies Enhanced Leveraged Fund was nil. The net value of its larger, less-leveraged fund was about 9% at the end of March, according to press reports. Both funds invest heavily in subprime MBS.
As for Bear's second-lien deal, the pricing talk for its double-A rated securities with durations of between four and five years ranged between 100 basis points and 300 basis points over the one-month Libor.
Early Thursday morning, JPMorgan Securities assembled thousands of market participants for a conference call on the subprime meltdown, during which analysts pointedly brought out several inescapable issues that will have to be confronted in the months to come. Bear Stearns' announcement raised the recognition that the market might have to reprice ABS CDOs more in line with what market participants had been getting out of the ABS market, said Chris Flanagan, head of global ABS and CDO research.
Also, rating agencies are not done with their downgrades.
"We do look for significant further downgrades across both the ABX and ABS CDO sectors over next the next six to 12 months," he said.
Another very pressing point is that rate resets on subprime mortgages originated in late 2005 and all of 2006 will pick up substantially in July. Given all of the adverse credit incidents that have happened lately, the bank estimates that 40% to 45% of the $500 billion of mortgages whose rates will reset will be cut off from credit lines necessary to refinance the loans.
"That represents a major problem, in terms of credit," Flanagan said. "Liquidity for borrowers is drying up. We will see an escalating of delinquencies ultimately turning into losses. I think there is no way to avoid that."
Showing just how compartmentalized the securitization market can be, several auto and credit card ABS deals in the marketing phase saw their tranches enjoy very tight pricing despite subprime RMBS woes.
The Americredit Automobile Receivables Trust, or AMCAR 2007-C, was expected to price it short-term portion at three basis points under Libor. The rest of the deal was rated triple-A and was pegged off of the EDSF, swaps and one-month Libor. The market expected its .90-year tranche to come in at no more than five basis points over EDSF, while a couple of two-year tranches were expected to come in at 10 basis points and three basis points over swaps and the one-month Libor, respectively. In the credit-card sector, the AMEX 2007-6 and 2007-7 series also saw their bonds enjoy good pricing talk.
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