Securitization

Merrill Lynch's decision last week to acquire subprime lender First Franklin Financial Corp. swept yet another investment bank further into the loan origination business - a trend which some are coining as a "paradigm shift" within the maturing subprime mortgage market. The move is expected to provide Merrill - along with the other Wall Street banks that have preceded it - a cheaper and more direct path to reaping proceeds of securitization. Market participants said it might be too soon to predict, however, how that cost savings might alter pricing in the home equity ABS sector.

Middle market commercial finance company Churchill Financial Holdings last week announced plans to acquire CDO manager Centre Pacific LLC - a move that will create another player in the rapidly growing middle market loan CLO space.

Washington Mutual is preparing to price the first covered bond program by a U.S. issuer. While the transaction is not structured as a genuine securitization and is being marketed overseas, it is eventually expected to have implications on the way that the Seattle-based thrift - as well as other peer companies - finances its operations.

Credit analysts see no reason - for now, at least - to downgrade the high-profile $2.1 billion Ballantyne Re securitization, despite the fact that the issuing entity, Scottish Re, suffered a series of downgrades that reduced its counterparty credit rating to junk status and its stock price is languishing at yearly lows.

Business in the ABS market continued to come out of its summer slowdown last week, as market players expected to see between $10 billion and $14 billion in new issues hit the market.

Anticipating full execution in the market this month, Moody's Investors Service recently published the final methodology for loss-given-default assessments (LGDs) and probability-of-default ratings (PDR), as well as implementing the methodology for new, first time issuers in the U.S. and Canada on Sept. 6.

It is set to be a busy September for the Australian market, with several transactions in the pipeline. Among those set to close deals are ANZ Bank, St. George Bank and Interstar Wholesale Finance.

Full Credit to Book (Equal if Joint) U.S. Public ABS Market/144A Market Managers Proceeds (mils) Rank Mkt. Share # of Issues Citigroup 8,456.9 1 16.7 13 JP Morgan 7,811.3 2 15.5 16 Wachovia Corp 6,097.4 3 12.1 11 Barclays Capital 5,227.8 4 10.3 8 Deutsche Bank AG 4,961.9 5 9.8 11 Royal Bank of Scotland Group 3,144.0 6 6.2 6 Credit Suisse 3,066.3 7 6.1 6 Banc of America Securities LLC 2,411.1 8 4.8 4 HSBC Holdings PLC 2,389.3 9 4.7 3 Merrill Lynch & Co Inc 1,847.5 10 3.7 4 Industry Total 50,514.0 - 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 Citigroup 23,630.7 1 12.2 40 Merrill Lynch & Co Inc 21,857.6 2 11.3 33 Deutsche Bank AG 17,600.1 3 9.1 25 Credit Suisse 13,572.0 4 7.0 21 Wachovia Corp 12,578.7 5 6.5 31 Bear Stearns & Co Inc 12,411.6 6 6.4 24 Banc of America Securities LLC 12,209.6 7 6.3 28 Morgan Stanley 10,631.8 8 5.5 37 UBS 9,676.6 9 5.0 40 JP Morgan 9,135.6 10 4.7 24 Industry Total 193,761.8 - 100.0 362 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 13,158.3 1 29.7 17 Citigroup 9,357.0 2 21.1 14 JP Morgan 7,824.7 3 17.7 18 Deutsche Bank AG 3,424.9 4 7.7 10 Barclays Capital 2,471.8 5 5.6 6 Morgan Stanley 1,929.0 6 4.4 3 Credit Suisse 1,800.0 7 4.1 9 ABN AMRO 1,000.0 8* 2.3 5 Merrill Lynch & Co Inc 1,000.0 8* 2.3 4 HSBC Holdings PLC 1,000.0 8* 2.3 1 Industry Total 44,317.5 - 100.0 67 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 21.3 3 ABN AMRO 1,250.0 2* 15.2 2 Lehman Brothers 1,250.0 2* 15.2 2 Royal Bank of Scotland Group 1,000.0 4* 12.2 2 Banc of America Securities LLC 1,000.0 4* 12.2 2 Barclays Capital 855.0 6 10.4 1 JP Morgan 500.0 7 6.1 1 Merrill Lynch & Co Inc 300.0 8* 3.7 1 Citigroup 300.0 8* 3.7 1 Industry Total 8,205.0 - 100.0 7 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 44,451.1 1 11.5 98 Countrywide Securities Corp 31,733.9 2 8.2 50 Royal Bank of Scotland Group 31,730.8 3 8.2 77 Credit Suisse 28,331.7 4 7.4 75 Morgan Stanley 28,257.1 5 7.3 29 Deutsche Bank AG 27,095.9 6 7.0 58 Bear Stearns & Co Inc 23,126.6 7 6.0 70 JP Morgan 22,326.1 8 5.8 50 Citigroup 21,209.6 9 5.5 56 Merrill Lynch & Co Inc 21,122.1 10 5.5 36 Industry Total 385,325.1 - 100.0 736 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 7,390.8 1 17.6 10 Deutsche Bank AG 6,320.7 2 15.0 9 Goldman Sachs & Co 3,809.3 3 9.1 5 Credit Suisse 3,666.6 4 8.7 7 Merrill Lynch & Co Inc 3,420.1 5 8.1 3 Banc of America Securities LLC 3,418.5 6 8.1 5 Morgan Stanley 2,928.3 7 7.0 4 Lehman Brothers 2,834.1 8 6.7 2 Wachovia Corp 1,610.0 9 3.8 1 RBC Capital Markets 1,500.0 10 3.6 2 Industry Total 42,080.8 - 100.0 32 Source: Thomson Financial

auto ABS 10% credit card ABS 9% enterprise finance 0% equipment ABS 2% real estate ABS 70% structured settlements 0% student loan ABS 8% trade receivables 1% utilities ABS 0%

Nelnet will administer the market's first single-seller ABCP conduit backed by student loan collateral. Credit Suisse structured the $5 billion market value extendable ABCP conduit, called Nelnet Student Asset Funding Extendable CP LLC, which was preparing to come to market last week. Market players in recent months had been predicting the emergence of the first such conduit, as well as the emergence of student loan-backed extendable notes.

Despite numerous calls and anecdotal evidence over recent months to the contrary, CDO investors still do not appear to be asking for much consolation when they buy into a deal run by a first-time manager. The so-called seasoned CDO managers - those who have weathered at least one full credit cycle - have been irritated by the ability of new managers to swoop into the market and price a deal only a couple basis points, if at all, wider than their own. They say investors purchasing bonds from new managers without a discount will regret that decision when making money isn't so easy.

The jury is in. Investors can expect a lower level of consumer bankruptcy filings as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act, which went into effect on Oct. 17. The act constituted the largest reworking of the bankruptcy code since it was enacted in 1978.

General Motors Acceptance Corp. last week locked in the initial $10 billion portion of its three-year, $25 billion asset-backed secured funding facility from Citigroup. The facility came as a term of the April 3 sale of a 51% controlling interest in GMAC by General Motors Corp. to a group of investors led by Cerberus Capital Management - which includes Citi, Aozora Bank and a subsidiary of PNC Financial Services. The closure came while GMAC was roadshowing an auto ABS deal rumored to be between $2 billion and $3 billion.

Wachovia Securities recently announced the hire of Asif Khan, who will join the firm as a managing director in alternative investments and CDO distribution within the structured credit products group.

The Securities and Exchange Commission recently released clarifying guidance on Regulation AB - Item 1122 (ASR, 08/14/06). ABS market participants have since applauded the move, although some have said that the clarifications are highly technical and do not address important issues that are still confounding the industry about Reg-AB implementation. Meanwhile, other market players have highlighted the clarifications that will benefit the asset-backed industry the most.