CDOs

As market participants move forward into 2008, many have hopes of liquidity returning to the ABS market. To this end, increased deal transparency is paramount to bringing investors back into the space, market sources said.

Best of Times, the Worst of Times

Despite widespread objections from securities professionals, the Financial Accounting Standards Board (FASB) is expected to approve a set of policies that would, in most cases, require financial institutions to link the initial transfer of a security and the subsequent repo financing for accounting purposes.

Credit Suisse's plan to lay off 500 people is part of a streamlining of its roughly 20,000 member investment banking businesses, sources familiar with the situation said last week.

Market value ABS CDOs have taken a beating from declines in the value of their underlying collateral. And now, the recent downgrades on synthetic CLOs backed by total return swaps have demonstrated that falling prices in the loan market have put CLO structures at risk too.

The mood was calm at The Loan Syndications and Trading Association's annual membership meeting last Tuesday, despite expectations of an uncertain year ahead for CLOs.

Arranger Unicredit Aton International hopes the anxiety of Western European investors will ease soon enough for them to consider a slice of a short-term cash CLO of Russian SMEs that closed at the end of December. "We are holding a small piece on a repo basis," said Dmitry Kozodoy, director of Aton's securitization department.

There wasn't any good news that emerged from the European CDO sector in 2007. But for banks and investors who braved the market and looked for some value in this beleaguered sector, European synthetic CDO tranches offered some respite.

After last month's announcement that uber-wealthy investor Warren Buffett's Berkshire Hathaway would be starting up a new municipal bond insurer, many industry participants felt that the competition would likely deepen the already strained capital positions of other wrap providers.

Recognizing that 2007 was an unusual year, and that highlighting individual transactions would not convey the ethos of a tumultuous year, the ASR staff has decided to veer away from our usual practice of naming notable deals. Aside from the comparatively scarce deal flow in 2H07, 2007 was notable not because of innovative transactions, but it will go down in history as a year of reckoning for all industry participants.

The reputations of the rating agencies mirrored the fate of the securitization market last year: As the credit conditions went south, so did their standing in the industry.

After a tumultuous summer in mortgages triggered a whirlwind of CDO downgrades, this past year will not be seen in a positive light for U.S. ABS CDOs.

Monolines appear to be the primary target in the securitization market's game of mortgage loss speculation. Sources said that revisions to rating agency criteria for guarantors and the negative outlooks that resulted were the ugliest points in 2007 for these bond insurers.

As the CDO market ushers in 2008, many industry players are hoping that the gloomy conditions that plagued 2007 will remain in the past. But with recession fears looming over the structured credit markets, and rating agencies tweaking their methodologies, new issuance will continue to move slowly, at least for the first half of the year, market participants said.

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.

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.

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.

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.