CDOs

Doubt over the monolines' triple-A-rating stability has been the subject of negative headlines since last summer. While a downgrade would have a dire effect on a guarantor's business model, particularly in the municipal bond market, which is especially dependent on the triple-A guarantee, there may be capital financing alternatives, market participants say.

Perhaps the most surprising element of the escalating concern about mispriced and hidden risk in financial markets is the lack of focus on derivatives - so far.

Walled in between the widespread perception of contagion in the financial markets and a long list of announcements of writedowns and layoffs, securitization industry professionals found themselves confronting another quiet week of productivity.

Aiming to create what it calls "a single family of global indices," Markit has acquired International Index Co. and agreed to acquire CDS IndexCo, in what will be the biggest and most important acquisition the company has made to date, according to Kevin Gould, executive vice president at Markit.

The coming months will likely bring an unprecedented amount of new litigation concerning asset-backed securities (ABS) and mortgage-backed securities (MBS) issued over the past two years. Disappointed investors are likely to pursue remedies on the strength of a variety of legal theories. Two concepts appear to be the most interesting at this point: (1) deficient disclosure about the trend of deteriorating loan quality and (2) deficient disclosure about the release of excess spread.

In what seems like an endless stream of write-downs on subprime RMBS and ABS CDO holdings, banks have had to revaluate their positions in the structured finance market, which lately means personnel reorganizations. But not all market participants are convinced that an internal restructuring will help solve the banks' problems.

Times are changing quickly for the student loan ABS sector, both externally and internally. While the asset class continues to attract attention from investor groups that are shying away from MBS products, lenders and secondary market financing sources are making progress in the way student loans are originated and securitized.

The market material adverse change clause, or "market MAC," gives banks the ability to walk away from their obligation to syndicate or hold debt if further deterioration of the credit markets takes place. Market observers have seen a return of the once-typical clause, but they say it has yet to establish staying power.

Plenty of criticism has already been lobbed at the rating agencies, and panelists at IMN's ABS East conference in Orlando certainly did not spare them any fault.

When compared to the ABS CDO market, the CLO market has remained relatively intact, despite the liquidity dry-up in the corporate credit market this past summer and heightened concern about subprime RMBS contagion. But while new issuance appears to be picking up, an expected increase in corporate defaults could create future complications for these vehicles.

Amid anxieties over what lies ahead, conference delegates got some strongly worded advice last week on how to promote the ABS industrys recovery: bite the bullet, take losses and structure future deals with larger equity components. If the subdued cocktail parties and many underlying bar-side conversations did not underscore the markets shaken confidence, then the remarks delivered during the opening session of IMNs ABS East conference might have.

Several CMBS, student loan ABS and esoteric deals have hit the market since Nov.1, and issuance totaled more than $11 billion. Still, market sources suggest that the asset securitization industry has a long way to go before real recovery begins to take hold.

In recent months, the securitization market had come to rely on the consumer ABS asset classes to sustain production, while the subprime MBS and CDO markets retreated. Last week, however, that small group itself-comprised of credit card, auto and student loan ABS-began to look winded.

As rating agencies boost their CRE-surveillance criteria to defend against opacity, the Commercial Real Estate CDO market appears to be learning from transparency troubles in the ABS CDO space. Recently, Derivative Fitch released a report requesting CRE CDO managers to distribute enhanced and standardized loan-level information to investors in an effort to avoid downgrade shock, while increasing market liquidity.

The complexity of asset-backed securities (ABS) and collateralized-mortgage obligations (CMOs) has played a major role in Wall Street's current difficulties valuing the assets, and it has also created processing complexities resulting in operational and potential reputation risks as well as millions of dollars in unnecessary costs.

After the recent launch of CMBX. NA.4, spreads on initial trading are wide, market participants noted last week, explaining that the lastest series references riskier commerical mortgage bonds than its predecessors.

As the securitization industry tries to make sense of life after the credit market meltdown, we at Asset Securitization Report thought it would be a good time to sit down with some of the top players in the RMBS and CMBS market and hear their views on where we've been, where we're at and where we're going.

Early in the asset-backed securities production week, issuance was so slow that one trader said he thought investors had already snatched up whatever attractive paper was on the table.

Cohen and Co. is in the market with a $408 million cash-flow trust preferred CDO, ALESCO Preferred Funding XVII. The deal will be the 22nd trust preferred transaction completed by Cohen & Company Financial Management and its affiliates, but it might not be the most profitable. Market players speculate that the company might only break even, if not take a loss on the transaction, in a move they see as an effort to promote market liquidity.

WASHINGTON - Almost as soon as the news broke that some of the largest U.S. banks had agreed to create a fund to relieve problems in the commercial paper market, proponents of the Basel II capital accords began arguing that the situation would have looked significantly different had the new standards already been in place.