Much of the trouble proliferating through the major indices last week could, in part, be traced back to the ABS industry. This is where fast money and high-risk structures fed a long period of growth in the housing market, which many market participants now concede was unsustainable.
Industry participants weathered another period of frightening equity, credit and debt market performances. Thus, the market was stripped of the overconfidence that fueled the fast-moving market of its momentum until late last year. Another issuance period passed with zero productivity, and whatever deals were announced received very wide pricing guidance.
Countrywide Financial Corp. triggered another wave of anxiety when it announced that it had to draw on an $11.5 billion credit line to fund operations, and Merrill Lynch subsequently downgraded the company's stock. Its latest announced deal, the CWL 2007-QX1, saw its offered bonds receive price talk at 50 basis points over Libor for triple-A bonds with 1.11-year durations and Libor plus 300 basis points on paper rated A2' by Moody's Investors Service.
Elsewhere, Bear Stearns announced a $672 million HEL transaction from its Bear Stearns Asset-Backed Securities Trust platform. In an angst-ridden market, however, arguably catalyzed by negative events from the bank itself, spreads on the triple-A-rated, 0.80-year tranche were being talked at 55 basis points over one-month Libor. Meanwhile, a triple-B tranche, which had a 5.23-year average life, saw pricing talk in the range of 1,200 basis points over the benchmark.
Instead of pricing deals, ABS market participants watched as the Dow dropped below the 13,000 mark for the first time since April. The Standard & Poor's 500 index went into negative territory for the year. The Federal Reserve put another $17 billion of liquidity into the banking system, but the central bank stopped short of market demands that the Fed aggressively cut rates to jump-start even more activity.
"Stocks seem to be teetering right now," one market professional said. "All eyes are on the equity markets. The ABS markets are the least of our worries right now."
While disruptions in the ABCP sector continued into last week and began to drag down the Canadian ABCP business (see page 9), several market observers started to take the pulse of structured investment vehicles (SIVs). The results were mixed. In an early-week report, Standard & Poor's said that the SIV market at that point was passing all of its stress tests. The rating agency further gave the sector a vote of confidence, citing the structures that provide for liquidity support to enable better decision-making regarding asset management, allow CP maturities to be spread out over multiple months and, if necessary, allow for an orderly liquidation over several months and years, among other things.
"SIVs have weathered various crises over the past 19 years, including the difficult credit conditions of 1990-1991, the Long-Term Capital Management collapse, and the Sept. 11, 2001, terrorist attacks," S&P Managing Director and Credit Analyst Nik Khakee said. "They have responded by diversifying into multiple funding markets, such as Europe and the U.S., and by maintaining access to the best available liquidity sources, including banks and easily traded assets."
UBS was slightly less sanguine. The SIV market comprises about 22 vehicles with $310 billion in outstanding debt. SIV assets are marked to market daily, and structures normally contain subordination, along with 10% in back-up liquidity from a bank. When deterioration in NAV reached half of the subordination, the structures are forced to unwind, said the bank. If maturing paper cannot roll, then the administrator can exercise a put option to the liquidity provider and the CP is paid out at par.
"We have heard in the past one to two weeks that a number of SIVs have been unable to roll their paper, and utilized the put," wrote the bank.
Aside from Countrywide and Bear Stearns, other transactions were announced, putting $5.1 billion on the new-issue calendar, according to Bank of America.
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