Securitization

Market sources expected new issuance to total slightly more than $15 billion last week, thanks in no small part to continued demand for HEL tranches that will feed into CDO transactions. By press time, about a third of expected issuance had hit the market and priced.

As the U.S. mortgage market continues its ugly decline, Countrywide Financial Corp. is looking to find profits in other lines of business - particularly those within capital markets. In a move that would further align it with the vertical integration strategy currently underway among Wall Street investment banks, the Calabasas, Calif.-based mega-lender may be looking to acquire an asset management business. This move is coupled with continuing to extend its U.S. Treasurys primary dealership to include derivatives and futures.

As the search for yield continues, both U.S. and European investors are seeking new kinds of exposure to CDO equity tranches. Zero-coupon equity and rated equity pieces in investment grade corporate synthetic transactions are on the rise in Europe, Derivative Fitch noted last week. The rating agency said it has received several inquiries from investors wishing to structure rated equity transactions.

Bank of America brought to the European market earlier this month the $546 million Pembridge Square Finance 2006-1, an interesting synthetic CDO referencing a $2.5 billion notional portfolio of both corporate obligations and ABS. KBC Financial Products is managing the deal, which was rated by Moody's Investors Service and Fitch Ratings.

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues JP Morgan 10,765.7 1 16.1 22 Citigroup 10,626.5 2 15.9 17 Wachovia Corp 9,764.8 3 14.6 16 Barclays Capital 6,578.7 4 9.8 10 Deutsche Bank AG 5,934.7 5 8.9 14 Banc of America Securities LLC 4,438.3 6 6.6 8 Royal Bank of Scotland Group 3,644.0 7 5.4 8 Credit Suisse 3,466.3 8 5.2 7 HSBC Holdings PLC 2,389.3 9 3.6 3 Goldman Sachs & Co 2,326.6 10 3.5 4 Industry Total 66,929.3 - 100.0 74 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 Merrill Lynch & Co Inc 35,427.1 1 14.5 50 Citigroup 26,395.8 2 10.8 44 Deutsche Bank AG 23,615.1 3 9.7 34 Wachovia Corp 16,268.4 4 6.7 39 Banc of America Securities LLC 15,765.1 5 6.5 33 Credit Suisse 15,763.8 6 6.5 25 UBS 15,602.1 7 6.4 55 Bear Stearns & Co Inc 14,487.7 8 5.9 29 Morgan Stanley 13,111.5 9 5.4 55 Groupe Caisses d'Epargne 11,424.1 10 4.7 14 Industry Total 243,749.2 - 100.0 461 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 Banc of America Securities LLC 16,845.6 1 29.2 24 Citigroup 10,982.0 2 19.0 16 JP Morgan 9,674.7 3 16.8 21 Morgan Stanley 4,055.3 4 7.0 5 Deutsche Bank AG 3,674.9 5 6.4 11 Barclays Capital 3,373.8 6 5.9 8 Credit Suisse 2,285.0 7 4.0 10 HSBC Holdings PLC 1,999.9 8 3.5 2 Merrill Lynch & Co Inc 1,375.0 9 2.4 5 ABN AMRO 1,000.0 10 1.7 5 Industry Total 57,673.8 - 100.0 85 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 1,750.0 1 18.8 3 Banc of America Securities LLC 1,554.5 2 16.7 3 Barclays Capital 1,409.5 3 15.1 2 ABN AMRO 1,250.0 4* 13.4 2 Lehman Brothers 1,250.0 4* 13.4 2 Royal Bank of Scotland Group 1,000.0 6 10.7 2 JP Morgan 500.0 7 5.4 1 Merrill Lynch & Co Inc 300.0 8* 3.2 1 Citigroup 300.0 8* 3.2 1 Industry Total 9,314.0 - 100.0 8 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 51,449.3 1 11.0 112 Countrywide Securities Corp 49,152.7 2 10.5 83 Royal Bank of Scotland Group 40,900.6 3 8.7 96 Citigroup 31,710.7 4 6.8 78 Credit Suisse 31,639.0 5 6.7 80 Deutsche Bank AG 31,599.2 6 6.7 73 Morgan Stanley 30,248.8 7 6.4 32 Bear Stearns & Co Inc 27,773.8 8 5.9 84 Merrill Lynch & Co Inc 26,830.4 9 5.7 45 Goldman Sachs & Co 25,801.5 10 5.5 63 Industry Total 469,768.7 - 100.0 915 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 10,609.6 1 19.4 12 Deutsche Bank AG 7,642.2 2 14.0 11 Credit Suisse 5,627.8 3 10.3 9 Banc of America Securities LLC 4,720.6 4 8.7 6 Wachovia Corp 3,951.6 5 7.2 3 Lehman Brothers 3,873.7 6 7.1 3 Merrill Lynch & Co Inc 3,819.9 7 7.0 4 Goldman Sachs & Co 3,809.3 8 7.0 5 Morgan Stanley 3,328.1 9 6.1 5 RBC Capital Markets 2,179.0 10 4.0 4 Industry Total 54,565.2 - 100.0 39 Source: Thomson Financial

auto ABS 11% credit card ABS 8% enterprise finance 0% equipment ABS 2% real estate ABS 69% structured settlements 0% student loan ABS 8% trade receivables 1% utilities ABS 0%

Fitch Ratings last week packaged its global CDO and structured credit services into a stand-alone company called Derivative Fitch - a move that is expected to allow the agency's derivatives ratings much needed breathing room from the one-dimensional nature of traditional bond ratings. Derivative Fitch will eventually offer credit ratings on a differentiated scale from the agency's traditional ratings, along with market risk analytics aimed to help to lift the veil of opacity long associated with the market.

Wisconsin Electric Power Co. pulled the plug - at least temporarily - on plans to complete a $500 million ABS transaction to finance certain environmental upgrades to its facilities, saying it could not agree with other major players in the transaction about the distribution of liabilities in the transaction.

After a quarter-end push, followed by a two weeks of issuance dragged down by two major holidays, the asset securitization market began to chug back to life again last week. Market players expected primary issuance to hit around $12 billion for the week, about half of which priced by press time last Thursday.

Sea Containers, the Bermuda-based marine shipping container leasing company that filed for bankruptcy protection last week, is struggling with an inefficient capital structure and $467 million owed to more than 20 of its largest creditors, but market participants say the company should be able to keep its covenants related to its ABS transactions.

Like gamblers to Las Vegas, investors are pouring into the derivatives markets in the hopes of winning the jackpot - that is, placing the right bet on the ability of U.S. consumers to make their monthly mortgage payments in a slowing housing market.

CDO notes have generally been a better investment than corporate bond swaps over the past three years, Wachovia Securities analysts said in a research report issued last week. For the study, analysts used a performance analysis based on new-issue spreads over the time period. While mezzanine CDO investors have enjoyed quite a bit of yield amid the recently stable credit environment, analysts are recommending an up-in-credit and asset diversification strategy going forward.

Several factors have led to the significant increase in CDO issuance, including the relatively strong corporate performance and a large supply of loans, along with the increasing size of the investor base and the flexibility provided by synthetic structures, according to the Bond Market Association. The BMA made this statement last week in conjunction with the release of its quarterly global CDO issuance data.

Trust Company of the West's credit mortgage group, led by group managing director Louis Lucido and charged with managing more than $26 billion in assets, recently took time to answer questions on the state of the U.S. housing market, new CDO structures hitting the market and expectations on investor demand. TCW, based in Los Angeles, is the world's largest CDO asset manager.

Disclosure requirements under Regulation AB (Reg AB) might not be terribly useful to ABS investors for the time being, but in due time, periodic updates might allow investors to conduct meaningful, time-series analysis of ABS issues, particularly in the credit card ABS sector, according to market sources.