10/02/2009

Emaciated Market Holds Out Hope for 2010

There's always next year.

Heading into the fourth quarter of 2009, market players don't foresee a surge in securitization volume that would put annual deal output even close to last year's worldwide total of $1.35 trillion - marking the industry's third consecutive year of contraction. However, hope is brewing for a slightly more robust 2010.

So far this year, issuers around the world have placed $653.5 billion of new asset-backed securities, collateralized debt obligations and residential and commercial mortgage bonds, according to Asset-Backed Alert's ABS Database. That measures out to a decline of 20% from the year-ago tally of $815.8 billion.

In some ways, that could be taken as an early hint of a recovery. Indeed, after a relatively strong start, new-deal flow lagged in the second quarter and eventually fell nearly 30% behind the mid-2008 total.

Looking into 2010, the gap might close even further as buyers that took on distressed home loans early in the credit crisis start carrying out plans to package rehabilitated accounts into new "scratch-and-dent" bonds. The expectations come partly in response to recent improvements in the performance of those players' holdings, said Scott Eichel, who co-heads global securitization trading at RBS - the world's most active underwriter of securitized products.

Outside the home-loan sector, there is a growing sentiment that buysiders have become more willing to take on risk. That's making it easier for issuers in a range of asset classes to find buyers for subordinate pieces of deals conducted with or without support from the Federal Reserve's 8-month-old Term Asset-Backed Securities Loan Facility, said Dan McGarvey, RBS' U.S. head of non-mortgage securitizations.

In part, the bolder approach can be attributed to general market improvements that have come with TALF, which offers government financing to buyers of certain asset-backed bonds. Paradoxically, the likely result will be more non-TALF deals for the fourth quarter and beyond.

It would be overstating the matter to predict a vast improvement in market conditions, however. Even with government programs around the world pumping liquidity into the securitization sector, it's clear that issuers are still hurting from the credit crisis. The upshot: Their year-to-date output is likely indicative of near-term flow, which would factor out to a full-year total of $850 billion to $900 billion.

At best, that's about a 30% decline from 2008 - a year that saw fourth-quarter supply suppressed by the aftermath of Lehman Brothers' collapse. Such a descent was once unthinkable for a market that saw staggering $2.7 trillion of deals completed worldwide just three years ago. In fact, the last time annual securitization volume was below $1 trillion was 2002.

"I think we're going to see new issuance activity at the same pace through the course of the remainder of the year," said Seer Capital executive Richard D'Albert. For example, he predicts that U.S. asset-backed bond volume will work out to about $10 billion per month.

D'Albert doesn't see much in the way of new residential-mortgage bonds between now and yearend, but he does expect a slight pickup in commercial MBS as issuers start floating TALF-eligible deals in that sector.

Without TALF's presence, it would be reasonable to conclude that U.S. issuance of asset-backed bonds wouldn't even be close to where it is now. Indeed, out of the $110.5 billion of overall asset-backed issues placed in the States so far this year, $78.6 billion contained senior classes eligible for TALF financing.

At this point last year, U.S. asset-backed bond volume stood at $142.8 billion.

As issuers of bonds backed by credit-card receivables, equipment leases, student loans and auto-related credits venture back into non-TALF deals, the program's investor base is also transforming. Hedge funds, once the dominant buyers of TALF-eligible securities, have responded to tightening spreads by seeking larger yields elsewhere - giving way to more traditional buyers like insurers and banks.

Securitization of prime-quality mortgages in the U.S., meanwhile, have accounted for $29.8 billion of this year's worldwide total. That's up from $18.1 billion a year ago, but the count is still far below where it once was. It also largely reflects balance-sheet driven repackagings of existing mortgage securities, known as re-Remics.

Europe's outlook is bleaker. With $474.8 billion of year-to-date volume among new ABS, CDOs, RMBS and CMBS in the region, volume is well off the year-ago figure of $563.8 billion. As for a match of the full-year 2008 figure of $1 trillion, that's a virtual impossibility.

As has been the case for a while, Europe's once-vibrant market is being driven by securitizations that large banks retain for use in repurchase facilities set up by the Bank of England and European Central Bank. Case in point: Only $51 billion of Europe's 2009 total has come outside the scope of those programs.

Optimists aren't giving up on 2010 though. They point to two deals as evidence of a possible revival: a mortgage-bond issue from Lloyds Banking and an auto-lease transactions from Volkswagen - both placed last month with private-sector buyers.

Bearish players, on the other hand, say the transactions don't prove that there's enough demand to support further supply. That's partly because buyers no longer have access to extensive leverage. "The market had a fantastic ability to raise capital back then," one European investor said, referring to pre-credit-crisis conditions. "The deals are definitely a positive step. But market appetite remains a huge question mark."

In addition to buoying deal flow in Europe, the Bank of England and European Central Bank programs have proven the deciding factor in the past several rankings of structured-product bookrunners around the world.

As of Sept. 30, RBS was this year's number-one underwriter of ABS, CDOs, RMBS and CMBS worldwide, with $66.1 billion of league-table credit. That gave the bank a 10.1% market share. It was also in first place a year ago. But the bank has derived $49.2 billion of its year-to-date total from government-repo deals in Europe - a type of issue that some market players have criticized as phony because they don't call for broad marketing campaigns. Without those issues, RBS would rank far lower.

Barclays, meanwhile, climbed from fifth place at midyear to finish the third quarter in second place among worldwide underwriters. Its $63.8 billion of deals were also weighted heavily toward government-repo transactions, although to a lesser extent than RBS. J.P. Morgan, Lloyds Banking and Deutsche Bank round out the top five.

With Europe's government liquidity programs playing so heavily into the worldwide rankings, it's only natural that the effect would be magnified at home. RBS is the region's winner when those deals are taken into account, with $51.1 billion of assignments on ABS, CDOs, RMBS and CMBS. But it falls to seventh place without them.

Barclays is second in the main European ranking, at $48.9 billion. Take away repo transactions, however, and it's in first. Lloyds, likewise, jumps from third place to second.

Among bookrunners of asset-backed bonds in the U.S., J.P. Morgan holds the number-one ranking with $25.5 billion of deals. It's followed by Citigroup at $22 billion and Bank of America at $21 billion. BofA benefitted the most from TALF issues, which accounted for $18.8 billion of its total.

J.P. Morgan also leads underwriters of mortgage-backed bonds in the U.S.

In the global CDO sector, Lloyds is number one. Its $14.7 billion of underwriting assignments account for only 22% of the $65.3 billion of CDOs completed so far this year. A year ago, the count was at $88.4 billion.

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

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