Asset-backed new issue supply surged to roughly $10 billion last week, pushing the market towards the most voluminous August ever. But the negative sentiment that recently crept into the ABS market persists and investors are now demanding fatter spreads, particularly for issues with the hint of potential headline risk.
The important factor, however, is that transactions are pricing, as the widening seen in ABS pales in comparison to what other markets have experienced. The troubles in other markets have led to more pronounced tiering, spreading even to financially sound issuers, with strong single-A unsecured debt ratings.
Additionally, the crossover demand from the corporate sector that drove issuance in the first half of the year has begun a reversal. Accounts that rushed into the ABS market as a safe-haven earlier this year are figuring out that the market has potential downside should headline risk hit a specific name or sector.
Those who are sticking with ABS are finding that they are in the driver's seat when a new issue is being shopped. "In the first half, it was a seller's market. Now, fear is driving spreads and some classes have a narrow selection of investors (from which) to choose," a syndicate source said.
Not all issuers fall into this category, as evidenced by Ford Motor Credit Co., which brought the largest and most successful new issue last week - tightening up to two basis points from initial guidance in some classes, while being increased in size due to strong demand. While demand was unquestionably strong, buysiders noted that the offered spreads were cheap versus where Ford ABS was trading in the secondary and the lack of top-flight names of late had left some uncertainty as to what market-clearing levels should be.
Ford's fourth ABS of the year, led jointly by Merrill Lynch & Co. and Salomon Smith Barney, let the market know both what efficient pricing is, as well as where demand lies. The one-year class saw demand focused on floating supply, as the A2B tranche grew to over $1.1 billion, from the initial $432 million seen at announcement. The two-year part of the curve also saw strong demand, leading both the fixed- and floating-rate A3A and A3B classes two basis points tighter from initial talk when the dust settled.
The sector most sheltered from pressure in the slight downturn currently underway, student loans, saw its strongest issuer - Sallie Mae - bring a $1.3 billion 2002-5 deal via Credit Suisse First Boston and JPMorgan Securities. While spreads came in outside of Sallie's previous offering, they held firm from initial price talk and within the context of the market.
While three-year A2 paper priced at three basis points over three-month Libor - in line with the previous offering - five-year A3 notes priced at 10 basis points over three-month Libor, versus the eight over seen for the five-year class of the 02-4 trade, which priced back in the carefree days of mid-June.
Freddie Mac was back in with a fully wrapped FSPC T-series home equity offering, backed by the A1 class of the EquiCredit 2001-1F. Earlier this month, Freddie brought FSPC T-47, which was backed by the A2 tranche of the same trade. Greenwich Capital Markets acted as lead manager on both deals. While spreads priced at the wide end of price guidance, they remained within the constraints of indicative levels.
MBNA Bank America brought three pre-enhancing subordinated classes from its MBNAseries issuance trust, totaling $450 million. With three-year triple-A, three-year triple-B and five-year triple-B notes, the market got a good idea where levels should be set for future offerings. The single-A B3 class priced at a respectable 40 basis points over one-month Libor. Triple-B rated five-year notes priced 120 basis points over one-month Libor and the fixed-rate three-year triple-B C5 priced at 110 over comparable swaps. Salomon led the triple-Bs, while Deutsche Bank Securities led the single-A rated offering.
Single-A rated Household Finance Corp., amid widespread concerns over its lending practices and its recently restated earnings, brought two offerings last week, $1.2 billion of auto loan and $977 million of home equity loan-backed notes - each backed by full Ambac wraps. While the auto loan deal, led jointly by Barclays Capital and Deutsche Bank, fared well, the home equity deal, via CSFB and Morgan Stanley, widened prior to pricing.
A trio of home equity offerings priced late in the week totaling $1.3 billion. GMAC Mortgage sold $540 million of home equity line of credit (HELOC)-backed notes via Banc One Capital Markets. Impac Mortgage Holdings sold $497.5 million of paper backed by a combination of Alt-A, subprime MBS and home equity loans via Countrywide Securities Corp. First Franklin Mortgage sold $288.7 million of subprime MBS-backed bonds via Greenwich.
Late in the week, a pair of deals broke for this week that should be tough sells at best. ARG Funding Corp. II is a $600 million securitization of rental fleet leases of bankrupt ANC Rental Corp's three principal operating units through Deutsche Bank. Oakwood Homes, a somewhat troubled issuer in a very troubled sector of the market, is in with a $164.6 million senior/sub offering via CSFB.