The U.S. ABS market saw heavy new issuance last week, pricing $10.6 billion of supply, up from just $2.5 billion the week before.
Even with the spate of supply hitting the market, spreads kept moving tighter for top-tier issuers, particularly in the auto and card sectors, as liquidity has once again become all- important. By contrast, despite new tights seen with deals from American Express and Chase Auto, off-the-run names are seeing deals restructured before pricing at widened levels.
Adding to the excitement in the primary, surprising announcements from NextCard and Providian Financial (see story page 1) as well as the U.S. Treasury's market-moving news that it would cease funding in the 30-year area of the curve, leading to the biggest Treasury rally in over a decade.
Peter DiMartino, head of ABS research at Salomon Smith Barney, noted the market focus in general has been on the primary because of investor interest in par-priced paper and particularly the efficiency of the syndicate process.
"Right now investors are not interested in buying outstanding paper in the secondary, they feel comfortable buying new issues because the levels are scrutinized by so many pairs of eyes that by pricing everybody is confident of the levels," he said.
Because of this, the top-flight names in the sector have had no problems attracting investor interest since the events of Sept. 11, while most others have struggled. In addition to the aforementioned deal from Chase Auto, DaimlerChrysler tapped the market last week at levels just outside of the Chase deal. Even though yield spreads were three to five basis points outside of Chase, the offering priced swiftly and without any retooling, which is an accomplishment in itself.
A $750 million deal from American Express and the second offering from MBNA since Sept. 11 hit the ground running, each going subject within 24 hours of announcement, leaving syndicate desks with the problem of allocating paper that is over two times oversubscribed. While AmEx had success based on the "charge not credit" card portfolio, which touts monthly payment rates over 80% and 2% chargeoffs, noted Barclays analyst Juliet Jones, as well as scarcity value (AmEx last issued off this trust in 1998). As a result, the new tight spread for three-year floating rate cards is now nine basis points over one-month Libor.
Also in the three-year area of the curve, MBNA did not do too shabby, pricing its senior A class at 10 basis points over one-month Libor. The relatively small size of the $500 million offering and reverse inquiry interest accounted for the ability to price so quickly, sources close to the deal said.
The long-awaited stranded cost ABS from the issuance vehicle of Dearborn, Mich.-based CMS Energy, coming in at $468 million, ended up facing a restructuring and priced fairly wide to initial talk. Despite the strength of the sector throughout most of the year, wide window payment structures combined with yield curve dynamics forced the deal to split the three-year tranche and create a new one-year and five-year seniors.
The 2001-1 deal from Consumers Funding LLC went from four triple-A rated tranches but ended up being six - five of which cut to under $100 million in size. Adding to the liquidity issue created by tranche size, buyside sources noted that with steepness in the curve seen at the time, and the 58-month window, the class actually offered investors negative spread.
But, in this new era, the positive note is that all deals offered ended up pricing on schedule, unlike last week, which could absorb no more than $3 billion of supply. According to Salomon's DiMartino credit that to the efficiency of the syndicate process.