07/03/2009

Government Aid Keeps Supply on Even Keel

Worldwide securitization activity is set to build ever so slightly in the next six months with continued central-bank support, as annual issuance volume heads toward its lowest point since 2002.

Issuers around the world leaned heavily on government-sponsored liquidity programs as they generated $409.1 billion of new asset-backed securities, residential mortgage bonds, commercial MBS and collateralized debt obligations during the first half of this year, according to Asset-Backed Alert's ABS Database. With that support still in place, industry players are looking for a full-year total of roughly $850 billion - meaning they foresee only a modest rebound from the depressed levels of the January-June stretch.

The main driver of any such recovery would be the U.S asset-backed bond market, as the flow of European deals holds steady at a slower pace than last year. But no matter what happens, it's a cinch that 2009 volume will fall far short of 2008's $1.4 trillion tally.

The last time annual securitization volume registered below $850 billion was 2001, when $768 billion of deals came to market. The industry then entered a period of explosive growth that would see annual supply peak at $2.7 trillion in 2006, only to fall to $2.3 trillion in 2007 as the global credit crisis took hold.

The steep drop to the 2008 figure, meanwhile, reflected a lack of late-year deals as credit-market conditions worsened. Even with this year's further reduction, however, market players said they are simply happy to see any sign of a rebound.

The development of a now-steady pipeline of U.S. securitizations, backed mostly by credit-card receivables, equipment leases, student loans and auto-related credits, is tied in part to growing demand from investors who want to finance their purchases through the Federal Reserve's Term Asset-Backed Securities Loan Facility.

"There is money coming off the sidelines," said Dan Castro of New York alternative-investment manager Huxley Capital, referring to money-market funds, pension plans and insurers. While those types of players were once the main buyers of asset-backed bonds, they weren't particularly eager to buy TALF-eligible bonds earlier this year.

That opened the door for yield-hungry hedge funds to dominate buying in the program's initial rounds in March and April, which saw light supply. Now the balance is shifting back toward traditional investors as their heightened appetites cause spreads to contract, even with deal volume up a bit in recent months. That pattern will likely accelerate going forward, with issuers coming forth with a particularly heavy flow of deals in September, Castro said.

Investors absorbed $58.8 billion of asset-backed bonds in the U.S. during the first half of this year, of which $39.5 billion contained senior classes eligible for TALF financing. The consensus among market players is that U.S. issuers will move another $60 billion to $90 billion of asset-backed issues by yearend, with an estimated 60-70% of that paper linked to the Fed facility.

"I would expect most of that to get done before Thanksgiving," Wachovia researcher John McElravey said, pointing toward a full-year total of $100 billion to $150 billion for the U.S. asset-backed sector.

The outlook for next year is still murky, however, as TALF is scheduled to expire on Dec. 31. Many industry players think the Fed will ultimately give in to mounting pressure by extending that deadline, preserving the liquidity it has already injected into the market.

Long-term issuance growth will also hinge on the potential return of securities lenders, who were big buyers of structured-finance products prior to the credit-market meltdown. Many of those operations, including units of large pension systems like Calpers and Ohio Public Employees, used to see top-rated securitizations as cheap, low-risk investments. They would then milk the positions for additional returns by lending them out for use in repurchase agreements, for a fee. "I think given the amount of ABS volume that was historically consumed by securities lenders, that a market without TALF needs their participation to succeed," one banker said.

Some market players believe the Fed could lure back securities lenders by expanding TALF to include previously issued asset-backed bonds, as it is prepared to do for legacy commercial MBS.

At $314.2 billion, year-to-date issuance of new asset-backed securities, residential mortgage bonds, commercial MBS and CDOs in Europe indicates that the full-year total will fall nearly $400 million short of 2008's $1 trillion. In the meantime, issuers in the region are still conducting the bulk of their structured-product financing through repurchase facilities set up by Bank of England and European Central Bank nearly two years ago.

Those programs, designed to support struggling financial institutions and keep loans flowing to underlying borrowers, accounted for all but $17.8 billion, or 5.6%, of new securitizations in Europe during the first half of this year. Now the central banks are looking for ways to unwind the initiatives. But it's widely believed that won't happen until 2010. "What they thought were stop-gap options have turned out to be medium-term options," one London investment manager said.

As has been the case throughout the credit crisis, government intervention in the structured-finance industry is shaping the underwriter league tables. When all transactions around the world are taken into account, RBS was the market's most active underwriter during the first six months of 2009, just as it was a year ago.

The bank's $35.2 billion of first-half transactions were good for an 8.6% market share. It was followed by Deutsche Bank, at $27.9 billion, and J.P. Morgan, at $26.9 billion. Fortis Bank and Barclays round out the top five - with only Barclays topping its year-ago total.

Excluding government-exchange deals in Europe, Barclays is the world's number-one structured-product underwriter with $7.6 billion of year-to-date assignments. Citigroup and RBS follow closely.

RBS heads into the second half as Europe's leading underwriter of new asset-backed bonds, residential and commercial mortgage securities, and CDOs overall. Fortis is second, with Societe Generale, Deutsche and Barclays also in the top five. RBS was also the first half's top underwriter of private-label mortgage bonds in the U.S., with credit for a third of a $14.1 billion market made up completely of re-Remics.

In the U.S. ranking of asset-backed bond underwriters, J.P. Morgan finished the first half with a market-leading $16.6 billion of league-table credit - $11.3 billion stemming from TALF deals. That put the bank well ahead of its closest rival, Citi.

Meanwhile, Depfa emerged as the busiest bookrunner in the global CDO business, where a mere $36.5 billion of first-half deals were completed.

Asset-Backed Alert's various rankings account for publicly offered and privately placed securitizations worldwide. They exclude continuously offered products, such as those from commercial-paper conduits, and the swap portions of synthetic issues.

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