CDOs

Hoping to duplicate its successful transformation into a major franchise brand, IHOP Corp. is using familiar securitization techniques to finance its $2.1 billion buyout and subsequent revamping of Applebee's International.

Troubles in subprime have begun to creep up the credit spectrum. As expected, after the bloodbath of recent subprime downgrades, the Alt-A RMBS sector took a hit last week.

Structured finance products show no signs of becoming simpler, so learning how to define these instruments is equally as important as understanding how to get the best value out of them.

Bond insurers have built a business on paying close attention to risk. For the most part, these monolines have earned their esteem by establishing triple-A portfolios. However, recent drops in the ABX index and the widening of CDO spreads, as well as subprime downgrades, have turned the scrutiny back on these insurers, with market participants questioning the security of their highly rated RMBS exposure.

The ABX.07-2 index began trading last Thursday, but after a fresh spate of bad news about the subprime mortgage market forced the market into a general slowdown, and with a typical summer Friday looming, the index was not expected to see much action for the week.

After Bear Stearns sent a letter to investors regarding the essential collapse of two of its hedge funds, stating that "there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High Grade Fund," several insiders say the losses were worse than expected.

Last week continued the plethora of rating movements - both positive and negative - for the RMBS and CDO sectors. The different rating agencies not only made several rating changes but altered their rating methodologies as well.

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Merrill Lynch 31,645.6 1 16.3 38 Citigroup Global Markets 26,753.1 2 13.8 36 Wachovia Securities 15,409.4 3 7.9 26 JPMorgan Securities 13,564.9 4 7.0 23 Morgan Stanley 12,301.5 5 6.3 54 Banc of America Securities 11,793.1 6 6.1 13 Deutsche Bank Securities 10,836.6 7 5.6 22 UBS 10,117.2 8 5.2 23 Bear Stearns 9,685.5 9 5.0 17 Lehman Brothers 8,402.0 10 4.3 16 Industry Total 194,348.8 - 100.0 337 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 Wachovia Securities 7,948.09 1 17.9 11 JP Morgan Securities Inc. 4,633.0 2 10.4 10 Banc of America Securities LLC 4,559.57 3 10.3 8 Credit Suisse Securities (USA) LLC 3,319.7 4 7.5 6 Citigroup Global Markets, Inc. 2,797.36 5 6.3 6 ABN AMRO Incorporated 2,782.95 6 6.3 5 Deutsche Bank Securities, Inc. 2,509.2 7 5.7 6 Barclays Capital 2,384.3 8 5.4 5 RBS Greenwich Capital 2,374.5 9 5.3 5 Merrill Lynch, Pierce, Fenner & Smith Inc 2,226.4 10 5.0 4 Industry Total 44,392.5 - 100.0 47 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 JPMorgan Securities 12,647.5 1 26.4 21 Banc of America Securities 10,423.3 2 21.8 19 Citigroup Global Markets 8,425.0 3 17.6 13 Morgan Stanley 4,652.6 4 9.7 6 Deutsche Bank Securities 2,095.83 5 4.4 9 Credit Suisse 1,696.3 6 3.5 5 Barclays Capital 1,675.0 7 3.5 4 RBS Greenwich Capital 1,400.8 8 2.9 9 Wachovia Securities 1,337.5 9 2.8 4 ABN AMRO 1,121.3 10 2.3 2 Industry Total 47,900.3 - 100.0 73 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 Countrywide Securities 23,860.5 1 12.7 25 Merrill Lynch 19,188.39 2 10.2 20 RBS Greenwich Capital 16,382.0 3 8.7 30 Lehman Brothers 15,156.9 4 8.0 24 Morgan Stanley 14,738.76 5 7.8 17 Citigroup Global Markets 14,604.4 6 7.8 19 Bear Stearns 12,237.0 7 6.5 22 JPMorgan Securities 11,198.7 8 5.9 14 Barclays Capital 10,312.6 9 5.5 12 Banc of America Securities 8,140.2 10 4.3 22 Industry Total 188,334.5 - 100.0 235 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 6,928.2 1 19.2 7 JPMorgan Securities 5,973.5 2 16.6 6 Deutsche Bank Securities 3,551.49 3 9.9 5 Credit Suisse 3,423.1 4 9.5 4 Barclays Capital 2,544.83 5 7.1 2 RBC Capital Markets 2,531.0 6 7.0 3 Goldman Sachs 2,326.17 7 6.5 3 Citigroup Global Markets 2,107.4 8 5.8 3 Morgan Stanley 2,090.1 9 5.8 2 Lehman Brothers 1,380.67 10 3.8 1 Industry Total 36,035.2 - 100.0 18 Source: Thomson Financial

aircraft ABS 0% auto ABS 11% credit card ABS 8% catatrophe bonds 0% enterprise finance 0% equipment ABS 2% real estate ABS 70% structured settlements 0% student loan ABS 8% trade receivables 1% utilities ABS 0%

The asset securitization market usually does not stop issuing new deals for any reason, except perhaps the usual holiday breaks. After enduring several days of downgrades on subprime MBS by Moody's Investors Service, and warnings of more from Standard & Poor's, however, the ABS market largely decided to hold back from issuing new debt last week.

One can hardly escape the home-buying process without passing several important milestones. During the closing of our own house purchase several years ago, the attorney said he was very concerned about the steady stream of "strange" mortgages being approved for buyers who would otherwise not qualify for traditional home loans.

SLM Corp.'s planned $2.5 billion securitization of FFELP loan receivables made news for a couple of reasons. The student-loan ABS issuer broke its four-month abstention from the ABS market, just as the House of Representatives passed legislation that threatens to terminate its $25 billion buyout by J.C. Flowers & Co., Bank of America, JPMorgan Chase and Friedman Fleischer & Lowe.

Standard & Poor's placed about $7.3 billion worth of subprime bonds on CreditWatch with negative implications last Tuesday, a dose of consolation to a market that originally thought the rating agency would downgrade $12 billion of bonds.

Small-balance commercial loans generally have a minor impact on overall securitization production, but the sector came out with a couple of significant developments last week. Not only did Lehman Brothers market a $500 million transaction; a rating agency added categories of small-balance commercial servicers, acknowledging the growth of the sector.

The recent troubles of the Bear Stearns Asset Management Funds, the halt on redemptions at United Capital Asset Management and the shutdown of a hedge fund at Braddock Financial might only be the first of many market rumbles to clock in on the RMBS Richter scale. However, market experts say their broader market effect may not be as widespread as some have expected.

An order to temporarily suspend redemptions in United Capital Asset Management's group of Horizon hedge funds and the closure of a separate hedge fund managed by Denver-based Braddock Financial, might have been reason enough to shock and subdue the ABS market last week, especially because they were the latest in a series of disturbing episodes caused by instability in the mortgage-backed securities market.