The asset-backed market took a bit of a positive turn last week as two marquee deals attracted big buy side crowds and priced on the tight end of initial guidelines. The market also showed signs of stabilizing as secondary trading picked up without much in the way of spread-widening taking place.
But most investors and sellers described the market as remaining sloppy. Most we're waiting for the first new issuance of third quarter to provide a fresh litmus for market environs going ahead.
The Good News
The secondary has seen a decent amount of trading with several bid lists making the rounds last week. About $200 million in asset-backed debt from franchise loans to credit cards to manufactured housing traded without dramatic spread widening. The amount of buying was not huge, but some generic two-way trading kept some desks busy, said sources.
Sallie Mae, back in the market after forgoing securitization for a year, was a cinch for good execution, as investors hungry for the government-sponsored entity's student loan paper took down the $1 billion deal quickly and in big chunks.
The four tranche deal priced within pre-launch levels, and was reported to have attracted a wide range of investors, including those who don't usually buy asset-backed securities. The offering had a lot of good things going for it.
In February, regulators of U.S. banks and thrifts lowered the risk-weighting to bonds secured by government-guaranteed student loans. The action was expected to boost those institutions' appetite for the bonds. In addition, three classes included in the sale were pegged to three-month Libor, while the remaining class was pegged to three-month treasury bills, which has been the traditional benchmark used by Sallie Mae. The new Libor benchmark was said to help attract investors who would ordinarily be wary of buying Sallie paper if they were forced to swap payments back into Libor from Treasurys. Goldman Sachs led the offering.
MBNA priced a $925 million credit card deal that - even after the company upsized it $175 million - was oversubscribed. Merrill Lynch led the transaction. Experts said that investors, if they weren't firmly on the sidelines waiting out the quarterend, were looking to migrate to vanilla debt like MBNA cards. But the truth of the market's tone may actually be hidden in MBNA's pricing stats.
The Bad News
Capital One, which priced a deal June 9, traditionally trades behind MBNA. But MBNA priced its three-year piece on its floating-rate card deal at 1ML+12.5, the same number Cap One garnered on its three-year tranche. Though sources said three-years on "a lot of things" tend to "lump up on one another," other market watchers thought the fact that credit card three-years were trading the same regardless of name meant that the softness that has affected the market lately appears to be continuing.
When comparing five-year cards on recent pricings, the widening is clearly marked. Providian priced its five-year piece at 25 above the curve, which is 7 out from where Discover priced its five-year chunk at 18 prior to that.
The main tenet of market sloppiness has centered on lack of demand for certain paper, whether it be off-the-run bonds or widely known offerings. Green Tree took over a week to sell its mixed-bag recreational equipment transaction. Sources said it was a bad time for a "kitchen sink deal." Sources also described a host of investors who are typically buyers affecting extremely difficult postures when it comes to pricing lately, especially in the face of larger, more familiar issuers.
"A number of big insurance company investors are full on some fairly frequent issuers," said an underwriter. "That's communicated by the yield within which they're willing to play. It's kind of meaningless when somebody says Yeah, I'm a buyer,' but they're a buyer at 25 or 40 [bps] back of where pricing is." - SK