Tales of challenging pricing for home equity loan deals continued to circulate last week, as yet another subprime lender filed for bankruptcy and market participants were left questioning which securities were safe.
Not surprisingly, HEL issuance is down this year from last year's levels, with new issues in the current environment being described as "feast or famine" depending on how recently the collateral backing them was originated, according to Deutsche Bank Securities traders. But while some buy-and-hold investors may be backing away from subprime for now, others, like bargain shoppers, are eager to find value among the discounts. As Barclays Capital analysts - parroting the oft-used industry phrase - wrote last week, "there are no bad bonds, only bad prices."
But depending on where one is looking to buy - cash, synthetic, high or low in the capital structure - volatility is causing a number of market participants to take a wait-and-see approach, sources said. Spreads on the ABX index have ratcheted in over the last two weeks from lows reached in the end of February, but those with a short interest are reportedly hesitant to dive in without more solid evidence that the subprime sector is at the beginning, not the bottom, of a downward spiral.
And while spreads - particularly in synthetics - have begun to show a bit of forgiveness, a fair number in the industry believe they are due for continued bouts of stress - and have not hit bottom. "The CDOs have kept spreads, in our view, artificially tight," said Chris Flanagan, head of global structured finance research at JPMorgan Securities, last week during a conference call. "What we are seeing in 2007 is the shorts effectively having their day."
For cash buyers, industry sources recommended waiting for new issue deals - primarily those with a large portion of revised underwriting standards behind them. Subprime loans originated in 2006 continue to be called the "worst vintage ever," with Fitch Ratings late last week pinning loss expectations for the vintage between 6% and 8%. And although JPMorgan analysts said last week that they recognized that loan modification and potential support from the federal government could harm HEL short positions, they noted that, "moral hazard risk associated with these two bailout options means that the options are not implemented in a way that averts the broad-based credit deterioration we have discussed in the past." Their recommendation: Short ABX 07-1 single-A and ABX 06-1 triple-B.
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