In a major show of support for ABS last week, Ford Motor Credit brought the most significant new issue to the primary market since the events of Sept. 11, pricing $2.6 billion of auto loan-backed paper through just about every dealer on the Street, as investors searched for guidance in volatile times. As a result, the primary market enjoyed a week of astonishing normalcy, pricing over $6 billion of supply in a variety of asset classes.
In the weeks of trading since Sept. 11, benchmark issuers MBNA and Chase Funding have also priced offerings, helping to set indicative levels for other issuers and investors to compare.
Sources noted that for issuers such as Ford and MBNA, which rely so heavily on securitization markets for funding and liquidity, it is necessary to spur confidence in the market and firmly establish why ABS spreads have been so stable all year despite volatility in alternative markets.
"Does a company like Ford have access to the corporate debt markets right now?" one analyst asked. "Facing credit rating downgrades from all three major agencies, I don't think so."
Last Wednesday Ford's corporate credit rating was downgraded two notches to A- from A+ by Fitch IBCA and was recently put on watch for a downgrade from both Moody's and Standard & Poor's.
Through an unprecedented four-way lead syndicate group consisting of Banc One, Deutsche Banc, JPMorgan and Salomon Smith Barney, Ford offered fixed- and floating-rate notes with tenors across the yield curve. The four banks also split the books although by most accounts Deutsche Banc was the group leader. For good measure Ford added eight high profile co-managers, getting each of the years top 10 houses involved, as well as Barclays Capital and Goldman Sachs.
"The underwriters had a real spirit of camaraderie' during the offering process," said David Kimball, manager of the securitization group for Ford. "Everyone involved wanted to show that the banks are united in support of the (ABS) market."
What resulted was described by Kimball as "one big order-fest." Demand for each tranche of the deal was strong, and one class was oversubscribed by 250%, according to sources close to the deal. Each of the publicly-offered classes priced in line with initial guidance, and cleared at those levels after freeing to trade the day after pricing.
Even though yield spreads are wider than in past issues this year, the company cited the benefit of significantly lower absolute yields, attributable to Fed rate cuts and soaring Treasurys which have lowered benchmark rates.
For example, the three-year senior class of the 2001-C offering Ford sold in May pays a fixed coupon of 5.25% while last week's 2001-E 2.83y senior class pays a coupon of just 4.01%, despite the more recent tranche pricing wider by eight basis points.
Following the disjointed $4.1 billion of supply the week previous, the primary market seemed almost as it was early this month, when issuance was on pace to set monthly volume levels. In addition to Ford, deals from Sears and Saxon Mortgage were well received and priced sporadically throughout. As is the case in a quarter's third month, mortgage-related supply was seen from various regular names.
Retail card leader Sears had great success selling its third deal of the year, seeing enough demand to increase its size by 40% to just over $700 million from the initial $500 million. The five-year floating-rate offering priced through Credit Suisse First Boston and JPMorgan jointly with a coupon of one-month Libor plus 25 basis points, at the tight end of guidance.
A leader in the home equity sector Saxon Asset Securities came in to sell $700 million of a senior/sub transaction, taking advantage of the aforementioned low absolute yields. Credit Suisse priced the deal, the second of the quarter and third of the year, at levels just slightly wide versus recent issues. The 2.5y AV2 class of last week's deal priced at 28 basis points over one-month Libor, just four back of the late July offering.
Unlucky enough to be in the market and expecting to price, just prior to Sept. 11, Irwin Home Equity restructured its deal and came back to the market successfully via lead manager Bear Stearns. New Century priced $522 million of sub-prime ARM product into the market and Countrywide sold $590 million of Hybrid jumbo ARM paper.
In the global markets, Granite Funding, a vehicle of lender Northern Rock, sold an equivalent of $2.2 billion of U.K. RMBS, $1.4 billion of which offered in dollar-denominated tranches. Because the deal had many buyers in many parts of the world, lined up prior to Sept. 11, pricing spreads looked to be at pre-attack levels, the 2.5y floating-rate senior class coming in at 23 basis points over one-month Libor.
Secondary trading lurched along throughout the week, waiting for new issue supply to offer price guidance and instill confidence in the market. Spreads for outstanding paper were quoted anywhere from two basis points wider for top-tier senior notes to 15-20 wider for subs.
"Trading in the secondary will pick up but not until [this] week at the earliest after some new issue flow gives us some direction," a west coast ABS trader said.
As is the case in the primary, secondary traders foresee a tiering process developing as the market moves forward. This trend has been developing for some time in the ABS market, but with uncertainty over just about everything in American lives right now, investors will seek to hold high quality paper rather than planning to pick up yield in off the run names.
