12/05/2008

Deep Freeze to Persist Through December

Don't look for a stream of new securitizations to follow a $466 million auto-loan transaction that Nissan completed this week.

Contradicting earlier talks that a successful offering from a well-regarded player like Nissan might unclog a U.S. issuance pipeline that has been frozen since the beginning of October, the word now is that few additional deals are likely to price by yearend.

In fact, the only other securitization that might be in the market is a $700 million auto-loan offering that Barclays has been shopping on behalf of Volkswagen - and the general sentiment is that wide-ranging pressures will keep new-issue production glacially slow into 2009.

Even before issuance shut down with the start of the fourth quarter, once-hefty issuers like American Express, Bank of America, Citigroup and J.P. Morgan were keeping their distance from the market. And many other big-time players, including Capital One and Sallie Mae, have signaled that they won't be back anytime soon (see listing beginning on Page 10).

"I think it's just going to be spotty," said an analyst at an investment bank. Still, he noted that there is a backlog of supply that will eventually prompt more issuers to test the market. "There's not a single consumer-finance company that could not [benefit from using] securitization right now to fund themselves."

There are some reasons to be optimistic. Nissan's deal, Nissan Auto Receivables Owner Trust, 2008-C, created considerable buzz as it was boosted by $100 million shortly before pricing via underwriters J.P. Morgan and RBS Greenwich on Dec. 2. Spreads ranged from 350 bp over Libor for a class of 1-year senior notes to 450 bp for a batch of triple-A-rated 3-year bonds, which is 100-150 bp tighter than comparable securities have been fetching on the secondary market (see Initial Pricings on Page 14).

The message, another investment-bank analyst said, is that there is demand for certain pockets of securities - something that was sorely lacking as the credit crisis sank to new depths just a few weeks ago.

In the meantime, investors are finding that the market downturn has blessed them with more power than ever to dictate deal terms. For instance, requests from buyers prompted Nissan to switch its deal from a pro-rata structure to a sequential set-up, in which senior bondholders must be paid in full before subordinate classes get anything.

A small pool of U.S. investment managers, insurance companies and others bought Nissan's bonds.

The Volkswagen Auto Loan Enhanced Trust, 2008-2, meanwhile, could fetch tighter spreads.

The reining in of yields could prove encouraging to other issuers, but even then the forecast is for December's deal volume to remain far lighter than usual - and some speculate that even Volkswagen may not move forward with its offering. Even now, spreads on Nissan's 3-year bonds are about 385 bp wider than they might have priced a year ago and nearly 440 bp wider than at this point in 2006. The fact that the transaction generated so much excitement underscores how badly the once-thriving market has been bruised by the credit crisis.

As for the upcoming months, "Issuance will decline dramatically and spreads to Treasuries should begin to stabilize, quite possibly at wider levels than we see today, and eventually contract," J.P. Morgan researchers wrote in a Nov. 28 report. They added that only top-tier issuers in the most desirable asset classes will be able to access the market, and that they'll only find demand for top-rated senior securities.

That means no sales of bonds backed by subprime auto loans, auto leases or dealer-floorplan credits, or mortgage-related assets such as home-equity lines of credit or non-U.S. home loans. Student-loan transactions should also remain scarce as lenders rely on U.S. Department of Education programs for funding. For the near term, "until securitization becomes more economical, we expect zero issuance," J.P. Morgan researchers wrote.

Before Nissan's offering priced, only a handful of U.S. securitizations had made it to market since worsening credit-market conditions sent issuers and investors to the sidelines two months ago. And with the notable exception of two subprime-auto deals that AmeriCredit placed via pre-arranged funding agreements, most of those transactions were "re-Remic" repackagings of existing mortgage bonds.

So just how far has issuance declined? With Nissan's deal, just over $2.4 billion of asset-backed securities, mortgage bonds and collateralized debt obligations have priced in the U.S. during the October-December stretch. That's down from $4.3 billion on just the first day of last year's fourth quarter, according to Asset-Backed Alert's ABS Database.

Among the 30 most active issuers in the U.S., only AmeriCredit, Citi and Nissan have been in the market since the beginning of October. Ten of the top 30 haven't offered deals since the first half of the year.

The expectations for this month would also continue a pattern in which the volume of ABS, MBS and CDOs priced in the U.S. fell to $18.5 billion last December, from $176.3 billion during the final month of 2006

Overall, $191.5 billion of such transactions have priced this year. That's an 86% decline from $1.3 trillion for all of 2007.

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