The asset securitization market usually does not stop issuing new deals for any reason, except perhaps the usual holiday breaks. After enduring several days of downgrades on subprime MBS by Moody's Investors Service, and warnings of more from Standard & Poor's, however, the ABS market largely decided to hold back from issuing new debt last week.
Early last week, S&P warned that it might slash the ratings on about $12 billion worth of subprime MBS. It was the first in an onslaught of negative ratings news. Later that day, Moody's announced a series of ratings downgrades affecting subprime RMBS from 2006 first-lien subprime RMBS and subprime second-lien RMBS. It also placed another 32 securities on review for possible downgrade. On Wednesday, Moody's went further, saying it might downgrade the ratings on about 184 tranches of CDOs worth $5 billion.
Initially stunned by the news, the ABS market drove the ABX indices to new lows and pushed spreads wider, according to market observers. Prices on the double-A tranche of ABX 2006-2 and 2007-1 fell three and four basis points, respectively, according to Credit Suisse. The triple-B prices had already dropped around two and three basis points over the past two weeks, respectively, and Wednesday's news only forced them to trade down further. The ABX 2007-1's triple-B-minus tranche breached the $50 point, when it traded at $49, said Credit Suisse.
Aside from punishing the ABX indices, ABS market players did very little, focusing instead on how the rating actions would ultimately affect them, according to several sell-side market professionals. Indeed, less than $5 billion of deals were expected to price by the end of last week.
"No one is surprised by it," one sell-side professional said. "People are very upset at the rating agencies, that they misjudged things as badly as they did."
The $2.5 billion Sallie Mae transaction, on which Banc of America Securities and JPMorgan Securities are acting as joint lead bookrunners, was expected to price by Friday. Despite action by the House of Representatives that could derail plans for a $25 billion buyout, the issuer's bonds were expected to price fairly well, say market participants.
Only a small handful of higher education lenders operate with corporate ratings, one market professional said, adding that: "In the end, this asset class is about collateral quality and servicing quality."
Further, for the most part, SLABS trade within a very tight basis point spread. Over the last seven years, basis points on SLABS have been as wide as 19 and as tight as even one point over the benchmark. In the last five years, the bonds have generally traded within a three-basis-point range.
Aside from its participation on the Sallie Mae deal, Banc of America was also prepping a $1.2 billion credit card transaction, which was expected to price by last Friday.
Frequent MBS issuer C-BASS was planning to come to market with a $433 million transaction, but the latest news from the rating agencies appeared to have affected pricing on those bonds already. The triple-A rated tranches were getting price talk at 12 basis points over the one-month Libor for the bonds with two-year durations. Pricing was as wide as 34 basis points on the six-year triple-As. As for the deal's four-year triple-B tranches, pricing talk ranged from 300 basis points to 750 basis points.
"We're guessing that the mortgage guys are sitting on their hands," said one market source, noting that most deals that were expected to price last week would probably come from overseas. - DM
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