ABS

New Jersey-based Principia Partners, which provides data processing solutions for structured finance and capital markets companies, launched a product that will help structured finance entities handle compliance reporting and accounting.

At $182.4 million, the Jersey Central Power & Light stranded cost transaction was not expected to make an enormous splash on the ABS primary issuance market last week. Still, it attracted attention from some traders simply because of the diminishing presence of stranded cost ABS issuances in the lineup of deals.

Fitch Ratings is asking investors for a little feedback. On Aug. 3, the rating agency rolled out a plan to add surveillance, metrics, analytics, research and tools to its ratings of structured finance deals on a monthly or quarterly basis. The exercise aims to assure bondholders that the rating agency is actively monitoring each deal.

Morgan Stanley has joined the growing list of investment banks making major investments in their mortgage securitization businesses by buying originators, servicers, or both.

Background

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JP Morgan 6,351.4 1 14.9 14 Wachovia Corp 6,106.4 2 14.3 11 Citigroup 6,027.5 3 14.1 12 Deutsche Bank AG 5,729.1 4 13.4 10 Barclays Capital 3,626.9 5 8.5 6 HSBC Holdings PLC 2,389.3 6 5.6 3 Royal Bank of Scotland Group 2,169.3 7 5.1 5 Banc of America Securities LLC 1,925.9 8 4.5 3 Merrill Lynch & Co Inc 1,847.5 9 4.3 4 Goldman Sachs & Co 1,701.7 10 4.0 3 Industry Total 42,728.3 - 100.0 50 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 20,959.6 1 12.5 28 Citigroup 20,259.6 2 12.0 35 Deutsche Bank AG 16,531.1 3 9.8 22 Bear Stearns & Co Inc 11,863.4 4 7.1 22 Banc of America Securities LLC 11,809.6 5 7.0 27 Wachovia Corp 11,279.8 6 6.7 28 Credit Suisse 10,506.7 7 6.2 19 UBS 9,676.6 8 5.8 40 Morgan Stanley 6,761.8 9 4.0 30 Royal Bank of Scotland Group 6,499.7 10 3.9 8 Industry Total 168,273.9 - 100.0 321 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 11,108.3 1 26.5 15 Citigroup 8,982.0 2 21.4 13 JP Morgan 7,824.7 3 18.7 18 Deutsche Bank AG 2,924.9 4 7.0 8 Barclays Capital 2,860.1 5 6.8 7 Morgan Stanley 2,289.1 6 5.5 4 Credit Suisse 1,735.1 7 4.1 8 ABN AMRO 1,000.0 8 2.4 5 HSBC Holdings PLC 1,000.0 8 2.4 1 Merrill Lynch & Co Inc 875.0 10 2.1 3 Industry Total 41,924.1 - 100.0 62 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 23.8 3 ABN AMRO 1,250.0 2* 17.0 2 Lehman Brothers 1,250.0 2* 17.0 2 Royal Bank of Scotland Group 1,000.0 4* 13.6 2 Banc of America Securities LLC 1,000.0 4* 13.6 2 JP Morgan 500.0 6 6.8 1 Merrill Lynch & Co Inc 300.0 7* 4.1 1 Citigroup 300.0 7* 4.1 1 Industry Total 7,350.0 - 100.0 6 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 35,795.4 1 10.2 84 Countrywide Securities Corp 31,733.9 2 9.1 50 Royal Bank of Scotland Group 30,204.5 3 8.7 75 Credit Suisse 27,350.7 4 7.8 72 Morgan Stanley 27,249.1 5 7.8 28 Deutsche Bank AG 25,353.1 6 7.3 54 Merrill Lynch & Co Inc 20,888.8 7 6.0 35 Bear Stearns & Co Inc 20,420.3 8 5.9 66 Goldman Sachs & Co 19,000.7 9 5.5 40 JP Morgan 17,207.5 10 4.9 38 Industry Total 348,552.8 - 100.0 675 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 7,390.8 1 18.0 10 Deutsche Bank AG 6,320.7 2 15.4 9 Goldman Sachs & Co 3,809.3 3 9.3 5 Merrill Lynch & Co Inc 3,420.1 4 8.3 3 Banc of America Securities LLC 3,418.5 5 8.3 5 Credit Suisse 3,306.5 6 8.1 6 Lehman Brothers 2,834.1 7 6.9 2 Morgan Stanley 2,568.2 8 6.3 3 Wachovia Corp 1,610.0 9 3.9 1 RBC Capital Markets 1,500.0 10 3.7 2 Industry Total 41,000.5 - 100.0 31 Source: Thomson Financial

auto ABS 9% credit card ABS 8% enterprise finance 0% equipment ABS 2% real estate ABS 70% structured settlements 0% student loan ABS 9% trade receivables 1% utilities ABS 0%

One-by-one various market players have come forward in recent weeks with predictions of slowing - in some cases negative - home price appreciation (HPA) in coming quarters. While actual HPA information varies depending on the source, and typically lags several months behind, both anecdotal and futures market information back up a prediction of slowing ahead. For example, the one-year futures-implied HPA on the Chicago Mercantile Exchange Composite Index has fallen in recent weeks to -4% HPA from 0%.

It took nearly seven years for the banking industry to hash out proposed revisions to the Basel Capital Accord and get the Federal Reserve to approve them. Now, while the industry awaits approval from the three other federal banking regulators, four large U.S. banks have raised objections as to how the revised accord should be implemented.

Cash flow models may not be keeping up with the rapidly growing and transforming high-grade ABS CDO sector, according to a report released last week by Deutsche Bank analysts. The U.S. high-grade ABS CDO sector has grown exponentially in recent years - to roughly $40 billion year-to-date from about $42 billion in all of 2005, and some $5 billion two years earlier - primarily due to demand on behalf of some investors for "safer," higher-rated portfolio assets. The deals now represent two-thirds of the entire structured finance CDO market, Deutsche said.

Investor demand might not have forced issuers to bring a lot of deals to the ABS market last week, as new pricings totaled just $11 billion. Traders and other market professionals, however, said the deals' warm reception kept spreads reigned in tightly across all sectors.

Recent leveraged loan spread widening could be a boon to new-issue CLO investors - as long as the widening is in fact due to market technicals. Bear Stearns analysts said as much last week, pointing out that widening in leveraged loan spreads could be owed mainly to supply and demand mismatches. On the fringes, some of the pull-back among certain investors could be due to loosened loan covenants, analysts said. But credit fundamentals within the U.S. loan market are widely anticipated to remain strong for several years - opening the door for equity investors to take ample opportunity of the record high return-on-equity in the space.

The release of standard documentation for trading CDO credit default swaps in early June was a major step toward transforming what has historically been a long-only market - and in the weeks following, the sector seems to be chugging along.

The Senate Banking Committee last Wednesday passed a version of legislation that aims to give the Securities and Exchange Commission explicit authority to regulate credit rating agencies. The Credit Rating Agency Reform Act of 2006, aims to increase competitiveness in the industry, address conflicts of interest, and if necessary, counter abusive practices.

As pricing finally begins to rise on institutional loans, CLO managers are frenetically scrambling to issue larger funds in order to invest in and take advantage of these juicier spreads. Jumping on board with one such new fund is The Carlyle Group, which announced the close of its eighth US high yield fund, Carlyle High Yield Partners VIII (CHYP VIII), last Wednesday. The new $525 million fund, which utilizes a traditional CLO structure, will invest a minimum of 95% of its assets in bank loans with a maximum of 5% in high yield bonds. Carlyle's leveraged finance group now manages $5.6 billion in assets.