ABS

Though still a drop in the bucket relative to the overall CDO market, interest in commercial real estate-backed deals has picked up to the point that mezzanine lenders are now getting into the act. RAIT Investment Trust, a mortgage REIT formed in 1998 that specializes in small mezzanine loans, plans to issue its first CDO sometime next quarter. Should that go well, it aims to issue another before the end of the year.

The ABS market got off to a robust start last week, as issuers posted $5.3 billion in deals on Monday. There was good news and bad news coming from the subprime residential mortgage sector. One-month prepayments of fixed- and adjustable-rate subprime RMBS declined across most vintages in February, according to Michael Youngblood, managing director of ABS research at Friedman Billings Ramsey, a trend that is expected to continue through March. At the same time, however, default rates also rose across most vintages.

Merrill Lynch, along with Pierce, Fenner & Smith, will bring to the market this week yet another in a string of CDOs that incorporate both funded and unfunded assets and liabilities. The $1.5 billion Bernoulli High Grade CDO I will be the first CDO managed by Babcock & Brown Securities, a subsidiary of Sydney, Australia-based investment firm Babcock & Brown.

Cigarette sales reached an historic 55-year low in the U.S., according to a survey by the National Association of Attorneys General (NAAG) that came out earlier this month. Cigarette companies are also complaining about other pressures that threaten their businesses. However, the negative headlines should not be a near-term problem for tobacco securitizations that have continued to come to market this year after a yearlong absence, according to Fitch Ratings.

Despite declining retail business, resulting in lower levels of managed receivables available to back securitized bonds, Ford Motor Credit Co., the financing unit of Ford Motor Co., plans to issue more ABS backed by auto loans and leases in 2006.

Year to date as of 03/16 Term (days) 03/10 03/13 03/14 03/15 03/16 1-week

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Citigroup 3,629.7 1 23.0 8 JP Morgan 3,344.2 2 21.2 8 Deutsche Bank AG 1,720.4 3 10.9 6 Royal Bank of Scotland Group 1,606.8 4 10.2 3 Merrill Lynch & Co Inc 1,250.0 5 7.9 3 Barclays Capital 1,094.9 6 6.9 3 Credit Suisse 950.0 7 6.0 2 Wachovia Corp 939.0 8 6.0 3 Bear Stearns & Co Inc 824.9 9 5.2 1 Goldman Sachs & Co 411.2 10 2.6 1 Industry Total 15,771.0 - 100.0 17 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 UBS 4,343.5 1 17.8 5 Merrill Lynch & Co Inc 4,166.8 2 17.1 7 Credit Suisse 3,107.4 3 12.7 4 Deutsche Bank AG 2,245.9 4 9.2 4 Citigroup 2,240.0 5 9.2 4 Morgan Stanley 2,107.5 6 8.6 11 Bear Stearns & Co Inc 1,990.4 7 8.2 5 Banc of America Securities LLC 1,549.4 8 6.3 8 Goldman Sachs & Co 795.9 9 3.3 1 Wachovia Corp 739.5 10 3.0 2 Industry Total 24,428.9 - 100.0 56 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 JP Morgan 5,943.2 1 33.4 11 Citigroup 4,447.1 2 25.0 8 Banc of America Securities LLC 2,973.3 3 16.7 5 Morgan Stanley 1,829.0 4 10.3 2 Deutsche Bank AG 1,568.5 5 8.8 4 Barclays Capital 500.0 6 2.8 1 Wachovia Corp 249.9 7 1.4 1 Credit Suisse 200.0 8 1.1 1 Industry Total 17,774.0 - 100.0 26 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 11,508.4 1 12.1 24 Credit Suisse 11,297.3 2 11.9 23 Deutsche Bank AG 8,342.6 3 8.8 10 Morgan Stanley 7,460.2 4 7.8 11 Merrill Lynch & Co Inc 6,910.8 5 7.3 8 Barclays Capital 6,061.1 6 6.4 13 Bear Stearns & Co Inc 5,411.1 7 5.7 17 Royal Bank of Scotland Group 5,381.2 8 5.7 9 UBS 5,215.6 9 5.5 18 JP Morgan 4,926.8 10 5.2 8 Industry Total 95,104.2 - 100.0 162 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 2,915.8 1 22.7 4 Deutsche Bank AG 2,053.0 2 16.0 2 Banc of America Securities LLC 2,027.7 3 15.8 3 Merrill Lynch & Co Inc 1,553.0 4 12.1 1 Lehman Brothers 1,284.7 5 10.0 1 Goldman Sachs & Co 1,255.5 6 9.8 1 Credit Suisse 950.4 7 7.4 2 UBS 450.4 8 3.5 1 SunTrust Banks 382.5 9 3.0 1 Industry Total 12,872.9 - 100.0 9 Source: Thomson Financial

auto ABS 9% credit card ABS 10% enterprise finance 0% equipment ABS 1% real estate ABS 72% structured settlements 0% student loan ABS 7% trade receivables 0%

The so-called VantageScore credit scoring system released last week by the three major consumer credit bureaus - Experian, Equifax, and TransUnion - is not expected to affect securitizations in the short-term, market participants said. Since neither Standard and Poor's, Moody's Investors Service, Fitch Ratings, nor the GSEs, can yet use the VantageScore product, its impact on the securitization industry is anticipated to be minimal at this point. The VantageScore is being marketed as an alternative to the widely used Fair Isaac Corp. FICO score.

Capital One Financial Corp. gained a more diverse funding source to sustain its lending business when it bought North Fork Bancorporation last week, a purchase that will reduce its reliance on the securitization market. Even so, the bank will be able to sustain its credit card ABS volume by tapping into credit card receivables from its newly acquired unit, say capital market sources.

In what some ABS market professionals described as a relatively light week, the ABS primary market turned out about $12.5 billion in new issuance. The credit card sector took a break from robust activity so far this year, and investors' reactions to lower retail sales and inflation data rattled Treasury yields throughout the week.

Amid a downturn in the U.S. housing market, a number of investors would shy away from pouring money into securities backed by subprime loans - much less the riskiest part of a mezzanine CDO backed by those bonds. But CDO equity tranche investors in this scenario could be paid long enough, at a high enough rate of return, to make the purchase worthwhile, according to Citigroup Global Markets.

The most recent bankruptcy within the U.S. auto industry is expected to put more pressure on areas of the country that are already facing growing unemployment, according to a Friedman Billings Ramsey report released last week. Furthermore, the dampening labor prospects in more than 70% of those areas are already inflicted by higher-than-normal default rates on residential mortgages.

The American Securitization Forum has released recommended best practices for the presentation and description of home equity trigger mechanisms. These best practices are aimed at promoting better disclosure of different collateral-based performance trigger mechanisms that change the allocation of cashflows in these types of deals, said the ASF in a release. The ASF believes that these improvements will increase the awareness as well as understanding of how these trigger mechanisms work, thus promoting more efficiency in the secondary market for home equity mortgages.

Leveraged loans are expected to become the next collateral type in line for growth within the synthetic arena. Despite the increasingly wide use of synthetics within ABS CDO structures, pure synthetic deals are not expected to overtake cash and hybrid deals as the most commonly issued structure, according to a Fitch Ratings report released last week.

Performance of both high-grade and mezzanine CDOs should remain on par with one another, as long as the national U.S. rate of home price appreciation remains at a long-term average of 5%, according to Lehman Brothers. Analysts at the investment bank wrote last week that a more challenging scenario for the consumer - such as a flat or negative rate of home price appreciation - would find the high-grade transaction significantly less affected than its mezzanine counterpart.