CDOs

auto ABS 9% credit card ABS 9% enterprise finance 0% equipment ABS 1% real estate ABS 75% structured settlements 0% student loan ABS 6% trade receivables 0%

The bankruptcy filing of troubled auto parts supplier Delphi Corp. late last year is known as the largest corporate credit event to rattle the credit default swap market to date - with more than $20 billion in total notional exposure. That makes the way in which the Delphi-linked CDS trades were settled a lesson for future evaluation procedures for a number of market participants. And while the $12 trillion - and growing - credit default swap market is expected to require a heavier reliance on an optional International Swaps and Derivatives Association's method for settling CDS index trades, events such as the Delphi bankruptcy last year illustrated that substantial price differences exist between bonds valued using the protocol and those using other settlement methods, primarily because prices were determined under the index protocol method some 40 days sooner on average.

ABS and MBS servicers - particularly those that use derivatives to hedge against fluctuations in the fair value of the assets that they oversee - had another cause to raise a pint on St. Patrick's Day, after the Financial Accounting Standards Board (FASB) issued guidelines that simplified the accounting for servicing assets and liabilities for most MBS deals.

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.