ABS

With no crystal ball to guide them, market players are finding it harder to predict how 2007's unprecedented liquidity crunch might affect future European CDO performance.

As one of the ugliest chapters in the history of securitization is being written, its hapless authors haven't had to devote much text to financial future flows. Consisting chiefly of diversified payment rights (DPRs) originated by emerging-market banks, the asset class has been performing nicely, at least through the third quarter of 2007. Historical events reinforce the idea that it would take more than a mere global liquidity crunch to upend this niche of ABS.

Michael Kanef has moved internally within Moody's Investors Service. Kanef, who was formerly group managing director in ABS, is now the chief regulatory and compliance officer at Moody's. He replaces Jeanne Dering who is retiring. There is no word yet on Kanef's replacement as the rating agency's ABS group is going through a transition period.

Choosy and cautious investors put the brakes on the ABS production market last week by tightening their purse strings. Without their money on the table, sell-side sources doubted that anything would be done at all before year end.

The Port Authority of New York and New Jersey and officials at LAX Airport, are being courted to implement a patented airport finance method that securitizes the lease payments that airlines make to the airports in order to use their terminal gates.

Selling subprime-related securities while shorting them is a common practice in the ABS market. However, some argue that the strategy might be grounds for lawsuits.

Several months after emerging from bankruptcy and several years after its last ABS deal, Northwest Airlines got into the securitization game again - albeit indirectly.

At a forum hosted by the American Securitization Forum last Wednesday in New York, ABS participants willingly shared the blame for current market problems, and admitted that a lot of the old ways of doing business, including relying so heavily on REMIC laws, will not work.

As the bulk of loans underlying the ABX.06-1 index approach their reset, market participants now say the performance of these mortgages could start 2008 off on a better footing than previously expected. They cited the better quality of the underlying loans and the timing of the resets as the factors contributing to the better outlook.

Individual restructurings continue across the SIV sector as sponsors take a more proactive stance in the run-up to M-LEC. Last week, Rabobank and Societe Generale announced proposals that would help their respective vehicles avoid enforcement.

For the last few months, many difficulties have beset European banks, with the latest hardship being write-downs announced by several of these firms. Despite these problems, financial institutions are still performing relatively well, even in the face of the negative headlines.

Argentine issuance rose in the last few months, not in the least bit scraped by a spike in interest rates. Yet the future isn't as bright, with tighter regulatory scrutiny of consumer ABS (see story below) and poor diversity away from that asset class likely to take a toll.

Argentine regulators have imposed a new rule on tranche issuance that could broaden the investor base for ABS while it simultaneously cools activity. Additional proposed changes might have a more chilling effect.

MBIA's shares traded higher last week on the announcement of Warburg Pincus' infusion of up to $1 billion of additional capital into the monoline insurer. MBIA sought the new capital to maintain its triple-A rating and to cushion loss expectations on its RMBS portfolio.

Michael Strange left the financial institution securitization group at Barclays Capital to take up a position at Goldman Sachs, according to sources familiar with the matter. A Goldman rep declined to comment. At press time, it was unclear when Strange, who helped build Barclays' presence in Russian existing assets, would start his new job. Whether Strange will switch to a different area at Goldman or ramp up its business in Russian securitization was another open question. At least publicly, Goldman hasn't been a player in the space of Russian securitization, though sources said the bank had a sizable Moscow office, making a significant dent in other areas of the Russian finance market. At Barclays, Strange was involved in arranging such transactions as mortgage deals for Gazprombank with euro and ruble tranches and a dollar RMBS for Vneshortgbank .

Just about three weeks remain on the ABS issuance calendar of 2007, but as every market professional knows, issuers and investors began their winter slumber a long time ago.

It is well known that the private loan market is seeing near-explosive growth. Now, the riskier side of such growth is coming to light, as Moody's Investors Service placed the rating of more than 16 notes in about a dozen student loan securitizations on review for possible downgrade.

The increasing number of government investigations into subprime lending, and continued losses on these loans have prompted a substantial amount of litigation.

As a result of declining issuance in the real estate and structured finance markets, Thacher Proffitt & Wood has joined the ranks of a number of other law firms, banks and asset management firms that have laid off staff in these departments.

As a sign that the European CMBS market might be coming back to life, Lehman Brothers priced its Windermere XIV, the first CMBS deal seen in Europe in nearly five months. Investor reaction to the deal could be indicative of renewed interest in CMBS.