Securitized Products Weekly Update: 12/22/08

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Securitized Products Weekly Update: 12/22/08


Securitized products continued to have a positive tone last week assisted by momentum from FOMC announcements. The RMBS sector benefited the most in hopes that aggressive downward pressure on mortgage rates will increase prepay speeds (thus enhancing yields in a deeply discounted market). CMBS shorter pays and junior AAAs firmed on the week along with more seasoned super dupers.


  • CMBS cash continued to stabilize (from violent Nov swings) last week on lighter flows, with shorter pay A1-A3 supers and AM/AJ classes tightening the most and LCF’s (Last Cash Flow classes) firm but generally unchanged
  • LCF’s trading around +950 (~$70 price; 12% yield) although the market is becoming more bifurcated between deals considered to be safer and those perceived to have real credit risk; the trading range between the most/least desirable ’07 LCF’s is now in the 350bps range
  • Non-super AAAs seeing renewed buying interest; AMs were up another 5-6 pts week-over-week now trading in hi 40s
  • The market is taking increased note of relative value in shorter pay A1-A3 classes, as those classes tightened 50-75bps on the week
  • CMBX.AAA.4 tightened 77 bps on the week on relatively light flows and profit taking
  • The street reports spending increasing efforts to educate opportunity funds interested in CMBS; appx 25% have started buying and 75% still completing due diligence
  • Fitch reports that CRE loan delinquencies (held in CRE CDOs) declined from Oct to Nov from 3.1% to 2.8% as a result of increasing loan extensions being granted
  • Centro, distressed Australian retail REIT who levered up to buy U.S. shopping centers, averted bankruptcy by transferring 90% ownership control to lenders in exchange for loan extensions on maturing debt
  • GGP, a major U.S. mall REIT, was able to extend maturing secured loans in exchange for lender concessions
  • Both the Centro and GGP situations reflect lenders reluctance to foreclose/liquidate in this market and indicate that more extensions/modifications are likely for maturing CRE (commercial real estate) loans that cannot be refinanced
  • Market chatter about the Federal Reserve possibly buying CMBS directly in secondary markets continues to get some press
  • JPM liquidated a portfolio of CMBS securities on margin from Guggenheim, a levered CRE strategy fund and large TRS player
  • CMBS market tone improving and feels like it will be better bid after the turn, although the fact that new loan origination remains in a deep freeze is of concern


  • RMBS continued to rally this week, Jumbo and Alt A super seniors were up 3-5 pts and Option ARMs were up 2 points
  • ABX 06 AAAs were up 2-4 pts and 07 AAAs were up 4-5 post FOMC moves and the government’s stated objective of driving down mortgage rates
  • Optimism in RMBS was sparked by hopes that lower mortgage rates will drive faster prepay speeds as the non-agency market presently prices to rock-bottom CPR assumptions
  • Both ML and JPM announced buy recommendations on non-agency AAA MBS based upon assessments that increasing traction from aggressive federal actions will accelerate the bottoming of the housing market and mitigate the risk of an over-correction on the downside
  • Affordability in a number of MSAs has now fully corrected to pre-bubble levels and lower mortgage rates will speed up the process across all markets
  • Although affordability metrics have improved and will further benefit from lower mortgage rates, rising unemployment will be a major headwind
  • Although mortgage modification efforts have yet to show results, the market senses a growing conviction on the part of the new administration to aggressively pursue mortgage modifications that will entail removing loans from securitized pools and encouraging principal reductions
  • JPM expects bottoming of house pricing to now occur in mid-09, escalating this timeframe from a prior expectation of 1H10
  • Citi is aggressively buying Option ARM super seniors and effectively setting market levels for this sector
  • Housing starts dropped to the lowest level in 50 years
  • JPM is advocating buying RMBS AAA Mezz trading in the $30s as it has the greatest convexity upside to increased mods/prepays
  • ML/Citi issued buy recommendations on super senior Option ARMs and certain Alt A AAA structures
  • Although most government actions have been initially directed towards improving conforming mortgage markets, non-agency RMBS is expected to become the beneficiary of 2009 actions expected to focus on foreclosure forbearance and more aggressive modification/principal writedowns

Credit Cards/Autos

  • Better tone to ABS market at higher-end of credit stack although flows were generally light and domestic Auto ABS continues to struggle
  • New Unfair or Deceptive Acts or Practices (“UDAP”) legislation passed will increase regulatory cost to card issuers but will have no significant adverse impact on profitability or trading levels
  • Some additional TALF details were announced including a term extension from one to three years; since TALF will only apply to newly issued ABS, it is likely to create a bifurcated market between TALF eligible and non-eligible ABS; TALF rate and haircut terms have yet to be announced
  • The BACCT (BofA) Credit Card Master Trust began trapping excess spread at the C class (BBB) level, prompting Card mezz classes to widen 50-75bps on the week
  • JPM significantly enhanced the WAMU Credit Card Master Trust by swapping out $6B of weaker accounts for stronger accounts
  • Although Nov results showed card charge-offs increased ~20bps to 6.7%, this was more than offset by margin improvement from declining Libor which boosted overall excess spread to 6.0%, up from 4.3% in Oct
  • Many synthetic CDOs invest note issuance proceeds in AAA credit card ABS due to cards historic ratings stability and available liquidity; liquidations of synthetic CDOs continues to adversely impact AAA card technicals as more AAA classes are forced back into the market
  • Auto ABS was buffeted by news highlighting rapid deterioration at GM and Chrysler and culminated with an announced bridge loan to get them over the turn
  • Independents and foreign issuer shelves continue to outperform domestic Auto ABS
  • Volkswagen was able to issue a new $1B ABS transaction last week; 1 year AAAs came at L+350


  • Little trading activity last week. BWIC with a AAA CRE CDO bond was talked in single digits (although didn’t trade) reflecting the rating agencies unwillingness to downgrade AAA CRE CDO paper. Market consensus on the bond was that there was little likelihood for any return of principal
  • Moody’s cautioned today that it will be reviewing their ratings on 109 CRE CDOs. AAAs may be downgraded 2-6 notches (4-8 notches on lower rated tranches). Moody’s expects to complete their review by Feb 09
  • JPM has been a large buyer of super senior AAA CLO paper the last few weeks. Huge OWICs over the last few weeks in 450a for high quality managers, which is about 100bps tighter than where BWICs had been trading. Current count has JPM adding $1.1BN to their $14BN AAA CLO exposure
  • A large wave of S&P downgrades on high yield loans last week threaten to trigger OC test failures in CLOs. Failure of OC tests results in cash flows being redirected from mezz class to senior note holders
  • S&P announced that they are reviewing the assumptions used to model CLOs and placed many mezz classes on negative watch over the last few weeks. BBB/BB classes are expected to be most impacted

Securitized Products

Name Approx $ Approx Yield Approx Spread Approx WoW Change WAL Description
CMBS First/Current Pay low 90s 11% 900 -50 bps 1-3 Class currently being repaid; top of credit stack
CMBS Second Pay low 80s 14% 1250 -50 bps 1-4 Class next to pay down after 1st pay
CMBS Last Cash Flow (LCF) 70 12% 950 flat 7-9 Most liquid and largest AAA class
CMBS AM 45 18% 1950 + 5-7 pts 7-9 20% Credit Enhancement, AAA Mezz class
CMBS AJ low 30s 25% 2350 + 6-8 pts 7-9 Junior AAA, CE is 10-13 area
CMBS IO $0.5-$2.5 23-25% 2300 -100 bps 2-4 Credit levered interest only strip
CMBX4 07-2 AAA 523 -77 bps Consists of 25 mid-07 CMBS deals
CMBX4 07-2 AJ 1449 -181 bps Sub-index of junior AAAs
RMBS Subprime First Pay 80s 15% 1300-1400 2 pts 1-3 Borrower FICO <685
RMBS Option ARM Super Senior ~42 16% 1300 3 pts 2-9 Alt A mortgages w/neg am options
RMBS Jumbo Pass Throughs ~69 4 pts 5-15 Prime borrowers w/loan size above conforming
ABX 07-2 LCF AAAs 32 1117 -34 Last cash flow subprime AAA
ABS Tier 1 Credit Cards (“AAA”) mid 90s 7% 525 flat 1-2 Shelves include JPM, CITI, BofA, and AMEXShelves include JPM, CITI, BofA, and AMEX
ABS Tier 2 Credit Cards (“AAA”) high 80s 8.25% 650 flat 1-2 Capital One, Discover, GE & private label retailers
ABS Tier 1 Cards (“A” Rated) low 80s 12% 1100 +50 bps 1-9 2nd loss mezz classes
ABS Tier 1 Cards (“BBB” Rated) low 80s 12% 1425 +75 bps 1-9 1st loss classes
ABS Prime Autos First Pay (“AAA”) mid 90s 7% 525 flat 1-2 Best shelves
ABS Prime Autos Second Pay (“AAA”) low 80s 7.50% 575 flat 2-3 Best shelves
CLO Super Senior 80s 7-9% 450-550 0 5.0-8.0 1st in CLO structure to be repaid
CLO Mezz (“BB” Rated) teens 65% 5700 0 3.0-9.0 Junior most bond in CLO structure, may “turbo”
CRE CDOs 40s/50s n/a 5.0-9.0 CDOs w/Whole Loans, Bnote/Mezz, CDO/CMBS