ABS

As evidenced by the growing CDS of CDO market, investors are becoming increasingly bearish on not only subprime mortgages issued in 2005 and 2006, but also on the CDOs that are buying the bonds backed by them. While rating agency sources say the first downgrades to these CDOs shouldn't be expected for several years, investors are expected to begin asking for more risk compensation before they buy the lower rated notes.

Securitization professionals spent most of last week networking at Information Management Network's ABS East conference, virtually silencing their trading floors at home offices. Out of an expected $14 billion in issuance, less than $300 million in deals priced by press time.

City night life, beaches - and oh, yes, cutting edge securitization business - await delegates at Information Management Network's upcoming inaugural Spring ABS 2007 in South Beach, Florida. Commencing on April 29 and running for four days, the spring conference will focus on pressing issues facing investors and issuers.

Orlando, Fla - Practices for assembling and implementing quality control on home equity loan pools are shifting dramatically on Wall Street, putting more onus on investors - and dealers sometimes - to do more due diligence on the ABS pools that they are interested in buying.

Orlando, Fla. - If the Starbucks coffee didn't wake up delegates who attended the early morning economist roundtable at Information Management Network's ABS East conference held here last week, then the lively interaction between panelists and their optimistic economic outlooks certainly did.

Orlando, Fla.- ABS analysts, traders and deal managers at Information Management Network's ABS East conference held here last week got into deep discussions about complex deal structures, regulatory issues and industry moving trends. But delegates for the session on first-time issuers got a thorough introduction to the workings of the asset securitization market, and what issues lay ahead as they tap the specialized form of financing.

Orlando, Fla. - Regulation AB was obviously the talk of the town at the Information Management Network ABS East conference held here last week. Delegates were swarming to the sessions to catch up on the latest developments. To demonstrate demand, for the Sunday sessions alone, three panels were devoted exclusively to the subject matter.

Orlando, Fla. - Issuers who want to bring new or esoteric asset classes to market should consult with rating agencies early on in the process, according to participants at the twelfth annual Information Management Network ABS East conference held here last week. These points were made at the panel entitled Bringing New Asset Types to Market: Challenges and Potential, Pitfalls for New Issuers'.

Orlando, Fla. - Although the participants at the opening panel of IMN's conference were generally predicting a dip in ABS volume for 2007 - from 5% to 10% - they said that derivative product will drive issuance going forward.

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JP Morgan 10,765.7 1 15.9 22 Citigroup 10,080.4 2 14.9 17 Wachovia Corp 9,764.8 3 14.2 16 Barclays Capital 6,578.7 4 9.7 10 Deutsche Bank AG 5,934.7 5 8.8 14 Banc of America Securities LLC 4,438.3 6 6.6 8 Credit Suisse 4,066.8 7 6.0 8 Royal Bank of Scotland Group 3,644.0 8 5.4 8 HSBC Holdings PLC 3,227.9 9 4.8 4 Goldman Sachs & Co 2,872.7 10 4.2 5 Industry Total 68,969.0 - 100.0 76 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Merrill Lynch & Co Inc 35,427.1 1 13.4 50 Citigroup 29,656.9 2 11.2 52 Deutsche Bank AG 24,881.0 3 9.4 51 UBS 22,068.1 4 8.4 57 Credit Suisse 18,207.8 5 6.9 27 Banc of America Securities LLC 16,565.1 6 6.3 35 Wachovia Corp 16,268.4 7 6.2 39 Bear Stearns & Co Inc 14,487.7 8 5.5 29 Morgan Stanley 13,961.5 9 5.3 57 JP Morgan 12,849.1 10 4.9 33 Industry Total 263,848.4 - 100.0 526 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Banc of America Securities LLC 17,095.6 1 29.2 25 Citigroup 10,982.0 2 18.7 16 JP Morgan 9,874.7 3 16.8 22 Morgan Stanley 4,055.3 4 6.9 5 Deutsche Bank AG 3,924.9 5 6.7 12 Barclays Capital 3,373.8 6 5.8 8 Credit Suisse 2,285.0 7 3.9 10 HSBC Holdings PLC 1,999.9 8 3.4 2 Merrill Lynch & Co Inc 1,375.0 9 2.4 5 Goldman Sachs & Co 1,100.0 10 1.9 4 Industry Total 58,623.8 - 100.0 88 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Deutsche Bank AG 1,750.0 1 16.6 3 Banc of America Securities LLC 1,554.5 2 14.7 3 Barclays Capital 1,409.5 3 13.3 2 ABN AMRO 1,250.0 4* 11.8 2 Lehman Brothers 1,250.0 4* 11.8 2 JP Morgan 1,125.0 6 10.7 2 Royal Bank of Scotland Group 1,000.0 7 9.5 2 Merrill Lynch & Co Inc 925.0 8 8.8 2 Citigroup 300.0 9 2.8 1 Industry Total 10,564.0 - 100.0 9 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Lehman Brothers 60,259.0 1 11.8 133 Countrywide Securities Corp 49,152.7 2 9.7 83 Royal Bank of Scotland Group 45,530.3 3 9.0 102 Citigroup 36,423.9 4 7.2 84 Credit Suisse 35,692.0 5 7.0 84 Deutsche Bank AG 33,296.3 6 6.5 80 Morgan Stanley 30,248.8 7 5.9 32 Merrill Lynch & Co Inc 29,355.2 8 5.8 49 Bear Stearns & Co Inc 28,185.5 9 5.5 85 Goldman Sachs & Co 26,965.8 10 5.3 65 Industry Total 508,837.3 - 100.0 976 Source: Thomson Financial

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Citigroup 10,609.6 1 19.3 12 Deutsche Bank AG 7,642.2 2 13.9 11 Credit Suisse 5,627.8 3 10.3 9 Banc of America Securities LLC 4,720.6 4 8.6 6 Wachovia Corp 3,951.6 5 7.2 3 Lehman Brothers 3,873.7 6 7.1 3 Merrill Lynch & Co Inc 3,819.9 7 7.0 4 Goldman Sachs & Co 3,809.3 8 6.9 5 Morgan Stanley 3,328.1 9 6.1 5 RBC Capital Markets 2,179.0 10 4.0 4 Industry Total 54,911.4 - 100.0 40 Source: Thomson Financial

auto ABS 11% credit card ABS 8% enterprise finance 0% equipment ABS 2% real estate ABS 69% structured settlements 0% student loan ABS 8% trade receivables 1% utilities ABS 0%

Subprime mortgage lender New Century Financial Corp. tapped Taj Bindra, Washington Mutual's executive vice president of mortgage banking, capital markets and servicing operations to replace Patti Dodge, its chief financial officer. Bindra's new role as CFO of New Century is effective Nov. 15. Dodge announced, following the second quarter, that she planned to leave her post as CFO, in exchange for a position as executive vice president of investor relations at the Irvine, Calif.-based lender. New Century also hired Ralph Melbourne, formerly director of strategic initiatives at Washington Mutual, as senior vice president, consumer direct division for its retail lending subsidiary Home123 Corp.

More than 3,000 industry attendants are expected at the JW Marriott/Ritz Carlton Grande Lakes Resort, for this week's Information Management Network twelfth annual ABS East conference. Participants are expected to grapple with industry conundrums that range from the cyclical, such as concerns about disruptions in the housing market, to best practices for dealing with emerging asset classes like covered bonds. Among the registered attendees, IMN estimates that some 1,300 are issuers and investors.

As expected, CDO managers feasted on the recent bout of asset-backed credit default swap spread widening - producing a two-fold effect of reeling spreads back in and pushing the burgeoning CDO pipeline out.

Constant proportion debt obligations (CPDOs), variations of CPPI structures, are one of the newest evolutionary steps to hit the CDO market. The spin helps to revise some of the rating and valuation challenges posed by the constantly changing nature of CPPI -- a move that is expected to garner a wider investor base and thus more liquidity for the sector. So far, all of the deals have involved investment grade corporate indices as the underlying asset. The addition of a manager to the so far static sector could be the next step in CPDO development. An innovator in the CPPI sector, ABN Amro has in place what was likely the first CPDO. Called Surf, the CPDO came to market as a three-tranche deal with a seven-year expected maturity, yielding 200 basis points. Not only are the high-yielding coupons attractive to investors, but an equally appealing feature is the ability for buyers to hold it on their balance sheets without placing it in a so-called alternative investments bucket. This is achieved because the CPDO structures offer a highly rated, stated coupon payment. The main difference between credit CPPI and CPDO structures that achieves those objectives are the lack of principal protection in the form of cash-out at the bond floor and the leverage mechanism, according to Cian Chandler, an analyst at Standard & Poor's in London. While the cost of principal protection in a CPPI structure is constantly referenced and dictates the total notional amount invested, CPDO leverage is unrelated to the bond floor, according to Chandler, who issued a report on the topic last week. There is a negative cash-out point in the structure, but it is typically set much lower than in CPPI deals, at 10% and 20% of note par. If reduction in the net asset value led to a cash-out scenario, the structure would unwind, with the investor taking a mark-to-market loss. Perhaps the starkest contrast to CPPI, CPDO strategies assume maximum leverage at the beginning of the transaction, with the exposure level decreasing as maturity approaches. While reserve fund availability in CPPI structures dictate the volume of so-called risky protection sold at any point during the transaction, CPDO structures follow a different formula. CPDOs use the difference between the net asset value of the underlying portfolio and the "cash-in" point, which is the present value of all future interest coupons plus par, according to Chandler. A key point is that the interest coupons provide CPDO structures with a fixed income that is unrelated to income generated, unlike CPPI structures. When the net asset value of the CPDO's underlying portfolio reaches the cash-in point, exposure to risky assets is reduced to zero, and the portfolio value is then invested at a risk-free rate, paying coupons and fees until maturity, upon which the note par is redeemed. This shortfall between the cash-in point and the portfolio net asset value drives the notional that can be leveraged. Because the leverage is derived from the ratio of the shortfall to the current credit spread on the risky asset, it is the inverse leverage formula to CPPI structures, which reduce notional exposure upon negative performance. Rating agencies have had a difficult time grappling with rated CPPI notes because in the "cash out" phase of CPPI transactions, interest is not paid until maturity -- a scenario that is viewed as a default.(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.