Securitization

August turned out to be a blisteringly dry month for the ABCP and structured investment vehicle (SIV) markets.

Not that anyone needed further proof of just how significant the collapse of the subprime market was last year. But, last month, the American Dialect Society selected "subprime" as the 2007 Word of the Year.

The reputations of the rating agencies mirrored the fate of the securitization market last year: As the credit conditions went south, so did their standing in the industry.

After a tumultuous summer in mortgages triggered a whirlwind of CDO downgrades, this past year will not be seen in a positive light for U.S. ABS CDOs.

Monolines appear to be the primary target in the securitization market's game of mortgage loss speculation. Sources said that revisions to rating agency criteria for guarantors and the negative outlooks that resulted were the ugliest points in 2007 for these bond insurers.

Whenever U.S. rating agencies assess foreign asset-backed commercial paper programs, it is fair to assume that the sponsor is about to issue ABCP in the U.S.

Three days into 2008, the ABS market was buzzing with more talk of layoffs and executive musical chairs than actual deal production. Despite the sluggishness and ongoing anxiety over how many layoffs are pending, however, traders and other market participants began gearing up for ABS deals secured by auto and credit card borrowings and other types of consumer debt.

Buoyed by solid credit performance, consumer ABS sectors are expected to perform well in 2008, and those asset classes might even see issuance increase by as much as 12% over the volume for 2007, according to early estimates from analysts at Citigroup Global Markets.

As the CDO market ushers in 2008, many industry players are hoping that the gloomy conditions that plagued 2007 will remain in the past. But with recession fears looming over the structured credit markets, and rating agencies tweaking their methodologies, new issuance will continue to move slowly, at least for the first half of the year, market participants said.

Lehman Brothers flexed its muscle in 2007 and once again took the crown as the top U.S. RMBS manager, according to Thomson Financial RMBS manager rankings for 2007. This widened the gap between the top placer and Bear Stearns, which repeated its second-place showing from 2006.

For European ABS market participants, it's a new year in name only. They have returned to work to deal with the same problems the sector faced in 2H07.

With no crystal ball to guide them, market players are finding it harder to predict how 2007's unprecedented liquidity crunch might affect future European CDO performance.

As one of the ugliest chapters in the history of securitization is being written, its hapless authors haven't had to devote much text to financial future flows. Consisting chiefly of diversified payment rights (DPRs) originated by emerging-market banks, the asset class has been performing nicely, at least through the third quarter of 2007. Historical events reinforce the idea that it would take more than a mere global liquidity crunch to upend this niche of ABS.

Michael Kanef has moved internally within Moody's Investors Service. Kanef, who was formerly group managing director in ABS, is now the chief regulatory and compliance officer at Moody's. He replaces Jeanne Dering who is retiring. There is no word yet on Kanef's replacement as the rating agency's ABS group is going through a transition period.

Choosy and cautious investors put the brakes on the ABS production market last week by tightening their purse strings. Without their money on the table, sell-side sources doubted that anything would be done at all before year end.

The Port Authority of New York and New Jersey and officials at LAX Airport, are being courted to implement a patented airport finance method that securitizes the lease payments that airlines make to the airports in order to use their terminal gates.

Selling subprime-related securities while shorting them is a common practice in the ABS market. However, some argue that the strategy might be grounds for lawsuits.

Several months after emerging from bankruptcy and several years after its last ABS deal, Northwest Airlines got into the securitization game again - albeit indirectly.

At a forum hosted by the American Securitization Forum last Wednesday in New York, ABS participants willingly shared the blame for current market problems, and admitted that a lot of the old ways of doing business, including relying so heavily on REMIC laws, will not work.

As the bulk of loans underlying the ABX.06-1 index approach their reset, market participants now say the performance of these mortgages could start 2008 off on a better footing than previously expected. They cited the better quality of the underlying loans and the timing of the resets as the factors contributing to the better outlook.