In what was most likely the last week of significant issuance for the asset-backed market, ABS spreads did not tighten in tandem with swap spreads. This caused a widening of asset-backed spreads versus swaps throughout the week.
"As the swap market is improving, we're not seeing asset-backeds come in with them," said a trader. "We've seen them widen in the face of tightening-in of swap spreads." Spreads widened three to five basis points over the week.
Swaps tightened in marginally on the short end of the curve and two basis points on the long end, further flattening the swap curve.
As market players look to get inventories positioned for the first of the year, lightening or liquidating inventories could put additional pressure on spreads.
However, secondary trading was light throughout the week, as many people began focusing on the holidays.
"I'd characterize it as very light," said Jeff Salmon, director of ABS research at Barclays Capital. "I really think you have a lot of people that are just clearly moving into holiday mindset at this stage."
Deals did get done last week, however. DaimlerChrysler priced a $1.5 billion deal that got done in line to slightly wide of guidance. The one-year tranche priced at 11 basis points over EDSF, while the three-year tranche priced at 19 over swaps, three basis points wider than price talk.
As auto companies such as DaimlerChrysler and Ford Motor Co. have been downgraded during the year, they are turning to ABS as a cheaper way of receiving funding. Salmon expects the auto pipeline to pick up again once the first quarter of 2001 begins.
Credit card issuers may be finished issuing for the year, but the equipment sector is still going strong.
Provident Financial Group marketed two tranches of a $465.7 million equipment deal; the $406.6 million senior class priced at 30 basis points over the one-month Libor, five to 10 basis points wider than talk.
HPSC Inc. was also in the market with the remaining tranches of its $530 million Rule 144A equipment deal.
Meridian Funding also priced $1 billion in medium-term notes in accordance to Rule 144A (see story, page 17). The $500 million 10-year floating-rate tranche priced at 37 basis points over the one-month Libor.
Also in the 144A market, Textron Financial is still marketing a $275 million commercial aircraft-backed deal.
This week, some smaller deals may get done, but "you'll really be hard pressed to see that getting done at this stage," Salmon said.
California Stranded Costs
California's power problems made their way back into the asset-backed market again last week, as an energy crunch in that state has forced market observers to take a closer look at stranded cost/rate reduction bonds in California.
While it is still too early to tell if the situation in California could pose a threat to the bonds, Salmon said that a California utility commission did make a statement that the financial solvency and stability of the utilities is paramount to the California energy crisis right now. No official comments were made about the bonds themselves.
