CDOs

The message from overseas is clear: murky waters still cloud Europe's CDO market, which has a strong taste for synthetics.

As the execution of traditional, fully tranched synthetic CDOs continues to be challenging, investment banks are reporting increased appetite for single-tranche CDOs (STCDO), which allow investors to choose custom risk/reward profiles.

The new spate of negative headlines surrounding specialty medical equipment leasing concern DVI Inc. spread further to its outstanding ABS last week. Two of three rating agencies downgraded DVI's ABS after the Securities & Exchange Commission deemed its most recent quarterly filing deficient after Deloitte & Touche resigned as auditor (see ASR 6/16/03). Questions of whether the programmatic issuer would soon be in technical default on its unsecured debt obligations, leading to a servicing transfer, prompted both Fitch Ratings and Moody's Investors Service to place all the outstanding ABS each agency had rated on watch for a downgrade. Standard & Poor's, meanwhile, remains confident in the current ratings.

2003 2002 2001 ABS (Public and 144A) 277,044 231,988 192,552 ABS (Public and 144A excluding CDOs) 260,802 203,706 166,342 ABS (Public Only) 232,496 183,060 139,772 ABS (144A Only) 44,548 48,928 52,780 Non-Agency MBS 168,217 108,740 89,671 Agency MBS 323,471 251,853 129,870 CMBS 36,226 23,996 29,792 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 4,444.3 1 14.5 6 Deutsche Bank AG 3,770.1 2 12.3 7 Citigroup 3,705.3 3 12.1 5 BANK ONE Corp 3,347.8 4 10.9 6 Credit Suisse First Boston 3,129.1 5 10.2 7 Banc of America Securities LLC 2,447.8 6 8.0 5 Barclays Capital 2,400.8 7 7.8 5 Morgan Stanley 2,265.7 8 7.4 4 Merrill Lynch & Co Inc 1,635.4 9 5.3 3 Goldman Sachs & Co 1,289.4 10 4.2 3 Industry Total 30,660.9 - 100.0 38 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 First Boston 2,978.7 1 18.3 9 Deutsche Bank AG 2,064.1 2 12.7 5 Wachovia Corp 1,959.4 3 12.1 6 Bear Stearns & Co Inc 1,673.2 4 10.3 6 Citigroup 1,547.6 5 9.5 4 Morgan Stanley 1,031.4 6 6.4 4 UBS 900.0 7 5.5 2 Banc of America Securities LLC 884.6 8 5.5 4 Goldman Sachs & Co 829.2 9 5.1 3 JP Morgan 697.6 10 4.3 2 Industry Total 16,241.2 - 100.0 51 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 10,421.7 1 26.1 16 BANK ONE Corp 8,026.8 2 20.1 14 JP Morgan 6,078.6 3 15.2 11 Barclays Capital 3,834.7 4 9.6 7 Morgan Stanley 3,579.5 5 9.0 4 Banc of America Securities LLC 2,537.3 6 6.4 8 Deutsche Bank AG 2,084.6 7 5.2 7 Credit Suisse First Boston 1,294.2 8 3.2 4 Lehman Brothers 823.1 9 2.1 3 Wachovia Corp 673.0 10 1.7 3 Industry Total 39,903.4 - 100.0 65 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 Deutsche Bank AG 1,375.0 1 39.7 5 JP Morgan 875.0 2 25.3 4 Citigroup 500.0 3* 14.4 1 BANK ONE Corp 500.0 3* 14.4 1 Banc of America Securities LLC 212.0 5 6.1 1 Industry Total 3,462.1 - 100.0 6 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 21,883.0 1 14.4 54 Countrywide Securities Corp 14,477.3 2 9.5 24 Royal Bank of Scotland Group 13,292.6 3 8.7 30 Citigroup 12,967.4 4 8.5 33 Morgan Stanley 12,198.2 5 8.0 27 JP Morgan 10,978.0 6 7.2 16 Deutsche Bank AG 10,255.2 7 6.7 25 Banc of America Securities LLC 10,076.3 8 6.6 28 Credit Suisse First Boston 9,557.1 9 6.3 24 Bear Stearns & Co Inc 7,603.8 10 5.0 17 Industry Total 152,285.0 - 100.0 276 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 3,746.1 1 22.8 7 Deutsche Bank AG 2,740.7 2 16.7 5 Morgan Stanley 2,599.9 3 15.8 4 Merrill Lynch & Co Inc 2,238.3 4 13.6 4 Credit Suisse First Boston 1,877.2 5 11.4 3 Banc of America Securities LLC 1,186.3 6 7.2 3 JP Morgan 514.1 7 3.1 1 BANK ONE Corp 507.6 8* 3.1 1 Lehman Brothers 507.6 8* 3.1 1 UBS 503.0 10 3.1 2 Industry Total 16,420.8 - 100.0 15 Source: Thomson Financial

Year to date as of Jul 2 Coupon Type Market Average Life Buckets Asset Class Volume Pub/144A Fixed Rate Floating Rate Public 144A 0.0 to 0.9 1.0 to 2.9 3.0 to 5.9 6.0 to 7.9 8.0 to 11.0 Aircraft Leases 1,365 1,365 1,365 1,365 Asset-Back Certs Auto Loans/Recs 36,061 28,494 7,567 34,603 1,458 10,054 18,896 6,929 125 35 Cash Catastrophe Bond Commercial Loans 311 188 123 311 311 Corp Bond/Note 1,882 366 1,483 1,882 1,294 56 532 Corporate Loans 4,384 385 3,965 4,384 1,392 774 161 906 1,152 Credit Card Rec 39,903 10,338 29,566 39,547 356 9,087 3,909 25,258 750 900 Debentures 1,670 1,670 1,670 1,670 Equip Loans Equip. Leases 5,480 3,679 1,801 3,866 1,613 1,279 3,458 668 75 FHLMC 2,231 2,231 2,231 2,231 FNMA 4,756 2,757 1,999 4,756 3,390 1,002 221 144 Floorplan Recs 3,462 3,462 3,436 26 750 2,712 Franchisee Loans 228 228 228 109 Health Care Rec Insurance Recs 622 622 622 622 Junk Bonds 2,293 233 2,060 2,293 734 490 1,069 Legal Fees Loans 3,175 3,175 3,175 3,175 Mnfrd Housing Ct 714 593 121 575 139 103 186 11 359 Motorcycle Loans 975 975 975 975 Mutual Fund Fees 342 116 226 342 342 Non-Jumbo Mtg Ln 35,775 11,281 24,154 31,617 4,159 13,868 6,899 13,488 1,173 197 Non-Perf Loans Oil Contracts Preferred Sec 1,034 204 805 1,034 108 108 177 640 Prv Issued Sec 505 178 327 87 418 505 Rental Car Rec. 1,775 1,050 725 1,775 650 1,125 Retail Contracts Rev Cred/Home Eq 119,622 50,778 67,530 109,636 9,986 56,429 34,124 26,582 1,829 514 Sm Business Loan 645 645 645 391 254 Stranded Costs Struc Fin Credit 11,502 2,294 9,171 11,502 6,515 352 671 2,393 1,489 Student Loans 16,641 600 13,289 15,270 1,371 2,618 3,357 5,384 4,428 142 Swap Agreement Tax Liens Timeshare Loans 303 245 58 303 303 Tobacco Receives 154 154 154 154 Trade Recs 225 105 120 225 225 Truck Loans Leases 450 450 450 Note: Figures are preliminary and subject to change. Data includes U.S. deals and dollar Euro 144As.Source: Thomson Financial

Rev Cred/Home Eq 41% Credit Card Rec 14% Auto Loans/Recs 12% Non-Jumbo Mtg Ln 12% Student Loans 6% Other 15%

There was no quarter-end rush to the ABS primary market, as June has seen steady new issue supply. Just under $8 billion made the rounds, with a pair of large trades targeted for late in the week. The week was dominated by smaller deals from off-the-run issuers, with the exception of the credit card sector, which saw the three leading names tap the market with de-linked structures.

UBS Warburg commented on the significant tightening in auto ABS in this week's Mortgage Strategist, attributing the trend, in part, to the market's over-expectation of supply when the year started. Most of the market was anticipating a spate of issuance from the larger players, such as Ford Motor Credit and GMAC, as conditions in the corporate market early this year looked less than stellar, UBS Warburg said.

The idiosyncratic features of hedge funds peg these investment vehicles as peculiar birds, albeit birds with a nice upside potential. Market sources report CDO investors are anxious to gain exposure to hedge funds via collateralized fund obligations, and a few have reportedly hit the U.S. pipeline.

The credit derivatives market and Shakespeare's Juliet have something in common this week: splitting hairs over what's in a name. In this most recent case, dealers, and synthetic CDO originators are contending with "restructuring," a credit event apparently falling under many names.

What is this, some sort of securitization lawyer cult?

While still in the lead in the race for the top ABS underwriter, Citigroup Capital Markets was only the fourth most active dealer in the three-month period ending June 30, according to preliminary numbers from Thomson Financial. Although Citi maintained a commanding lead heading into mid-year, Lehman Brothers made a strong push to jump to the third spot overall, from the fifth spot at the end of the first quarter.

Last week, Lehman Brothers brought to market a US$57.5 million, arbitrage synthetic CDO, Golden Jade CDO, with the Agricultural Bank of China acting as portfolio manager. This transaction represents a growing trend in non-Japan Asia, where the managed arbitrage synthetic CDO sector is becoming increasingly active.

Year to date as of Jun 25 Term (days) 06/12 06/13 06/16 06/17 06/18 1-week