CDOs

The U.S. ABS primary market generated $15 billion in issuance last week, carrying the market into its final month of what has been another record-breaking year. Issuance volume for 2005 has already surpassed last year by over 20% and, if prophecies about a pre-Reg AB issuance glut are correct, it could pass the $1 trillion barrier.

Not long after information bearing the actual extent of the damage caused to the Gulf Coast region by Hurricane Katrina began to hit investors on Wall Street, mortgage lenders, insurers and others, did the conversation turn to the future - and what natural disaster, and where, could hit next.

Defaults and losses in the manufactured housing sector increased for most vintages, while delinquencies were mixed and repossession levels improved for most vintages, according to a report by Credit Suisse First Boston.

Even while prepayments in the residential mortgage market cool down, the number of commercial mortgage borrowers currently prepaying their loans is not only soaring but anticipated to accelerate through year-end and into 1Q06, according to Wachovia Securities analysts. For the CDOs backed by CMBS and other commercial real estate assets that indicates a chance that performance could be boosted, resulting in upgrades. In the same manner, increased call options on unsecured credit obligations have accelerated paydowns in the later-vintage high-yield CDO market (see ASR 8/22/05).

The U.S. auto ABS market has soared to new heights this year with over $100 billion in issuance, and performance has stayed strong throughout and even improved, according to analysts. However, questions about the strength of the U.S. consumer loom in the background, as do the ever-present theories that the hot pace of the sector, and the ABS market in general, will crack and come tumbling back to earth.

Amid growing investor concern regarding mortgage fraud, New Century Financial Corp. announced that it partnered with a company to implement fraud prevention software into its loan origination software.

As the number of U.S. consumer bankruptcy filings have returned to earth in recent weeks, the industry has been busy digesting the impact of the surge in filings and what it will mean for credit card ABS. Last week, a team of experts assembled by Barclays Capital put forth some perspectives on what it all will mean for the sector.

The U.S. ABS primary market took a slight holiday break as the Thanksgiving holiday approached last week, but still managed to generate a cool $8 billion in just two days. The shortened week may have caused a number of issuers to sit out, and the market may also have been sapped of a good bit of capacity, having generated nearly $30 billion the previous week. Even so, a healthy mix of real estate and commodity ABS priced or was announced in the two days before ASR went to press.

As the tail of the newly developed ABS CDS market wags the dog of the home-equity ABS market, analysts are hoping a more mature CDS market could bring the end of recently volatile home-equity ABS spreads. According to sell-side researchers, widening of home equity ABS CDS spreads is largely thought to be the primary cause for the recent widening seen, particularly for triple-B rated tranches.

Fitch Ratings is working on a new methodology for assigning formal seller/servicer ratings to auto ABS issuers and should have the criteria ready sometime next year. Fitch Associate Director Lena Katsnelson confirmed the methodology was being finalized but could not specify when it would be available. Additionally, Fitch published a report outlining its auto ABS ratings criteria last week.

Dynamic Credit Partners expects to bring its second CDO to the market before year-end, according to sources. The $992 million Barrington CDO Ltd. will contain as much as an 80% concentration of RMBS collateral, up to 50% of that being subprime mortgages.

Chase Manhattan Bank, N.A. added $4.5 billion in additional receivables to its First USA Credit Card Master Trust, according to Securities & Exchange Commission filings. The move is seen as an attempt to buttress the trust in the wake of a spike in chargeoffs wrought by recently implemented bankruptcy reform. The trust currently has $6.5 billion outstanding, which is spread over nine transactions, and has not issued a deal since 2001.

Standard & Poor's said the increase in credit card minimum payments, due to go into effect at the end of next year, will not negatively impact credit card ABS and will more than likely be offset by higher payment rates and the positive effects of recently enacted bankruptcy reform.

NEW YORK - In the ongoing debate over if and when the oft-referenced housing bubble will burst, the latest ABS analyst to publicly weigh in expressed his belief that the bubble will experience a "slow hiss" as prices gradually decline. "Most of the time, bubbles end softly...the air hisses out," said Mark Adelson, director and head of structured finance with Nomura Securities, speaking at the Asset-Backed Securities Summit hosted by Financial Markets World last week.

In a Herculean effort, the U.S. ABS primary market generated $27 billion in new issues last week, as issuers likely rushed to get deals done before the Thanksgiving-shortened week.

Rental car company Hertz Corp., a unit of Ford Motor Co. that will soon become a stand-alone entity, is not expected to issue significant amounts of auto ABS after it becomes a stand-alone company, say analysts. Despite having a near-junk corporate debt rating (BBB-/Baa3/BBB-), which is soon expected to fall even further, the company is expected to maintain its foothold in the high-yield debt market and should not be forced to over-utilize the ABS market for funding.

As RBS Greenwich Capital analysts put it last week, "it has been a while since we last saw it, and new investors in the sector may not recognize it. Volatility has returned to HEL credit." The volatility is a result of pricing fluctuations in the home equity ABS credit default swap market, the cause of which is not entirely clear.

Investors looking to exploit the newly volatile home equity ABS sector are expected to be among the catalysts for the growth in a relatively new CDO structure, combining both funded and unfunded assets and liabilities, to hit the U.S. market.

Imagine the embarrassment of a synthetic CDO manager when, forced to purchase the par amount of a referenced asset gone bad, also has to suck up nearly the entire amount of the deal's excess credit enhancement in order to fund the purchase, consequently causing a rash of downgrades.

Capital One Financial Corp. scooped the credit card industry last week by being the first to provide full FICO score distributions for its credit card trust as will be required on Jan. 1, when Securities & Exchange Commission Regulation AB goes into full effect.