CDOs

Drawing on reserve funds has become more common among U.K. subprime RMBS transactions, with two deals siphoning cash just this month and others likely to follow.

The home equity loan sector back in the early part of the millennia - along with other segments of the capital markets - grew comfortable with a historically low interest rate environment, structuring their deals accordingly. Fast forward to the present, in the face of rising interest rates, some of those deals might face interest shortfalls that hit their available funds caps thus exposing them to greater basis risk, JPMorgan Securities analysts say.

The asset securitization market did not exactly come roaring back last week from its spring break. While market professionals hoped that the market would produce about $14 billion in new issuance by week's end, it actually came in at about $5.2 billion by press time.

While speculation continues to swirl about a pullback in the housing market, the homebuilder market is seeing slower top-line growth, ample unsecured credit agreement capacities and large cash balances. Combined, these factors have driven down debt issuance among home builders, and the trend is likely to continue, said Standard & Poor's.

More trust preferred securities-backed CDOs are expected to come to the market this year - with the number of rated deals topping $30 billion this month. Furthermore, these upcoming transactions are expected to contain a wider range of assets compared to older deals.

Last week Polaris Securities became the latest Taiwanese entity to complete a collateralized bond obligation. As with the previous issues, Polaris' NT$12.2 billion ($376.8 million) deal was an attempt to address the drop in value of structured bonds in Taiwan that has hit bond funds in the last 18 months (ASR, 10/31/05).

Bit by bit, more light is beginning to shine through what is arguably the most opaque corner of the CDO market - equity tranches. Helping matters are some initiatives from market players including Moody's Investors Service's recent announcement that it would begin tracking CDO equity return data. Furthermore, Wachovia Securities - whose analysts were concerned that Moody's data reflected bleaker-than-realistic returns - took that information a step further in order to ascertain more precise figures.

Commerzbank kicked off the season for small and medium enterprises (SMEs) loan CDOs with its CB Mezzcap deal, which priced at the beginning of April. It was closely followed a week later by a transaction from HSBC Trinkhaus & Burkhart. On the heels of these two transactions, market sources say there are several more CDOs of this type expected to come to market later this year.

Like many of his peers in the European leveraged loan market, Don Procter, chief investment officer of London-based investment management firm New Amsterdam Capital Management (NAC), believes that the unprecedented growth in the asset class should be viewed with some caution.

More than half of all downgrades experienced by the U.S. CDO sector in the first quarter stemmed from synthetic transactions, according to Standard and Poor's. However, only 17 synthetic CDOs were downgraded, compared to a record 43 in the fourth quarter.

Year to date as of 04/19 Term (days) 04/13 04/14 04/17 04/18 04/19 1-week

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 8,676.4 1 16.8 11 Citigroup 7,807.5 2 15.1 15 Banc of America Securities LLC 5,653.5 3 11.0 14 UBS 4,779.0 4 9.3 12 Deutsche Bank AG 4,304.0 5 8.3 7 Credit Suisse 3,621.4 6 7.0 5 Bear Stearns & Co Inc 3,551.6 7 6.9 8 Goldman Sachs & Co 2,280.9 8 4.4 4 Morgan Stanley 2,107.5 9 4.1 11 Wachovia Corp 1,857.3 10 3.6 6 Industry Total 51,641.2 - 100.0 113 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 5,077.2 1 26.7 11 JP Morgan 3,956.1 2 20.8 10 Deutsche Bank AG 2,020.4 3 10.6 7 Barclays Capital 1,725.5 4 9.1 4 Royal Bank of Scotland Group 1,606.8 5 8.5 3 Merrill Lynch & Co Inc 1,250.0 6 6.6 3 Credit Suisse 950.0 7 5.0 2 Wachovia Corp 939.0 8 4.9 3 Bear Stearns & Co Inc 824.9 9 4.3 1 Goldman Sachs & Co 411.2 10 2.2 1 Industry Total 19,024.6 - 100.0 25 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 5,974.7 1 29.8 11 Citigroup 4,447.1 2 22.2 7 Banc of America Securities LLC 3,723.3 3 18.6 6 Deutsche Bank AG 2,300.0 4 11.5 6 Morgan Stanley 1,829.0 5 9.1 2 Credit Suisse 625.0 6 3.1 2 Barclays Capital 500.0 7 2.5 1 Lehman Brothers 250.0 8 1.3 1 Wachovia Corp 249.9 9 1.2 1 Royal Bank of Scotland Group 175.0 10 0.9 1 Industry Total 20,074.0 - 100.0 30 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 Credit Suisse 17,182.8 1 11.2 34 Lehman Brothers 15,130.9 2 9.9 34 Countrywide Securities Corp 15,001.3 3 9.8 17 Morgan Stanley 13,244.8 4 8.6 17 Deutsche Bank AG 11,019.7 5 7.2 20 Bear Stearns & Co Inc 10,364.3 6 6.8 30 Merrill Lynch & Co Inc 10,045.8 7 6.6 13 JP Morgan 9,863.4 8 6.4 15 Royal Bank of Scotland Group 9,348.1 9 6.1 12 Citigroup 8,663.0 10 5.7 24 Industry Total 153,414.1 - 100.0 264 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 16.4 4 Deutsche Bank AG 2,801.0 2 15.8 3 Credit Suisse 2,466.6 3 13.9 4 Merrill Lynch & Co Inc 2,301.0 4 13.0 2 Banc of America Securities LLC 2,027.7 5 11.4 3 Lehman Brothers 1,284.7 6 7.2 1 Goldman Sachs & Co 1,255.5 7 7.1 1 Morgan Stanley 768.2 8 4.3 1 UBS 450.4 9 2.5 1 SunTrust Banks 382.5 10 2.2 1 Industry Total 17,759.3 - 100.0 12 Source: Thomson Financial

auto ABS 8% credit card ABS 9% enterprise finance 0% equipment ABS 2% real estate ABS 73% structured settlements 0% student loan ABS 8% trade receivables 0%

MBIA has made a debut placement off its Mexican shelf, the first issuance program a guarantor has set up in pesos. The kickoff deal, for toll road operator Promotora y Administradora de Carreteras (Pacsa), came to 1.5 billion UDIS ($500 million), with 1.1 billion in senior notes wrapped by MBIA. That's just a nick in the five-year shelf, which is capped at Ps25 billion ($2.3 billion).

Last week Black Diamond Capital Management joined the growing list of U.S. firms looking for opportunities in the burgeoning European leveraged loan market. The firm announced it hired Peter Cannon as a managing director of its new European shop, Black Diamond GB, which will open June 1. Cannon most recently worked as a senior portfolio manager at RMF Investment Management (a subsidiary of Man Group), where he played a key role developing the firm's CDO business. He has also worked as a senior fund manager for Merrill Lynch Investment Management and as director of acquisition finance at Lloyds TSB. "We see the leveraged loan market in Europe as very robust with excellent growth prospects for us, and we believe that Peter Cannon is uniquely qualified to help us take our presence there to the next level," said Bill Bokos, senior managing director of Black Diamond, an alternative asset management firm with about $8 billion in assets under management. "We expect to be adding staff to build-out our effort in London in the near-term future."

The Public Service Commission of West Virginia recently approved a plan that would allow Allegheny Power to use ABS to finance an emissions control facility at a West Virginia plant.