With spreads for top-tier ABS issuers offering little value, for the first time in a while the Street is noticeably recommending that investors look to headline names for yield and potential spread tightening. In particular, AmeriCredit Corp., The Metris Companies and Capital One Financial have all tightened in the past three months and given the current economic fundamentals, "now is the time to switch the mindset from defensive to aggressive in order to take advantage of opportunity when presented," note researchers at JPMorgan Securities.
Despite a feature story in last Thursday's Wall Street Journal implying that the ABS market has become a haven of volatility driven primarily by the aforementioned names, empirical evidence, Street research and spread tightening suggest the contrary. Capital One's 2003 credit card securitizations, boosted by better-than-expected first-quarter earnings, have tightened significantly since pricing, although spreads are nowhere near levels seen before last year's memorandum of understanding (MOU) with federal regulators.
Researchers at Credit Suisse First Boston write, "with Capital One's triple-A floaters still near 25 basis points [wide of] best names' and their triple-B's still some 145 basis points wide to those same issuers, we think the potential for further tightening in their card ABS remains very strong and represents some of the best value in the credit card ABS market." Since pricing its first credit card ABS in early April, traders report that the three-year COMET 2003-A1 has tightened nine basis points and is currently bid at 30 basis points over one-month Libor.
Despite the general negative sentiment over the name and more expensive funding costs, Capital One has managed to raise $3.9 billion in the ABS market this year, of which $1.8 billion is backed by credit card receivables and $2.1 billion by auto loans. Just one of this year's deals - the $1.1 billion 2003-A auto loan ABS sold May 16 - featured a wrap.
Another beleaguered issuer, AmeriCredit - currently in the middle of a turnaround - admits that "there were widespread concerns about us several months ago but by the second half of the first quarter, we were on target with our originations slowdown," said company spokesman John Hoffmann. Commenting on the WSJ article, he added, "not all the facts are accurate in light of today's market environment."
Metris, which has yet to bring a term ABS this year, has also seen spreads tighten roughly 10 basis points for its triple-A rated paper in recent months. The most recent transaction from Metris, MMT 2002-3, which priced May 29, 2002, was quoted at 20 basis points over one-month Libor for the initial three-year paper with two years remaining. MMT 2002-4, an initial five-year deal from May 20, 2002, is trading at roughly 28 basis points over one-month Libor, sources said. Both transactions are backed by a full MBIA wrap.
Part of the reason for this play into lower-tiered issuers is cyclical, note researchers at JPMorgan Securities, who theorize that the worst in terms of headline risk is behind the market. "So much bad news for ABS is behind us - Conseco Inc.'s bankruptcy, Fairbanks' servicer rating downgrade, NextCard Inc., etc. We believe that opportunity is emerging and probably will continue to emerge over the next three to six months," added JPMorgan.
In mortgage assets as well, the play seems to be down in credit. According to RBS Greenwich ABS research head Peter DiMartino, "Ironically, most subprime MBS pools are probably better equipped to handle defaults than their prime MBS counterparts, given the lean credit enhancement levels in the prime jumbo mortgage market."
"Credit enhancement on prime mortgages has narrowed such that investors in subordinate prime jumbo MBS could experience some turbulence if some large loans default early, while subprime MBS pools are better positioned because loan balances are smaller, and credit enhancement is more abundant," DiMartino added.