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January 13, 2017  

New-Issue Lag Drives Secondary Trading

With the supply of new structured-finance deals off to a slow start this year, secondary-market trading is running strong.

The activity reflects a situation in which investors have ample capital to put to work, both in the form of fresh January allocations and money they set aside to take advantage of late-year fire sales that failed to materialize. Meanwhile, only a smattering of new offerings have surfaced since Jan. 1.

The upshot in some asset classes has been a rise in values, with CLOs benefitting the most. Among CLOs from well-regarded managers, double-B-rated mezzanine notes with 7.5-year lives moved in 50-75 bp over the past week to trade at discount margins of about 600 bp. Pricing on deals from lesser issuers remained difficult to pin down, although sources reported movement even among securities that couldn’t find bids in recent months.

Other asset classes, including auto loans, saw securities hold onto gains in value they experienced over the past two months. “All kinds of structured products are trading well,” one sales specialist said. “Anybody who wants to put money to work is trying to find assets to buy.”

While the interest has brought some secondary sellers into the market, supply has increased only modestly. According to Empirasign, the combined volume of outstanding asset-backed securities, mortgage bonds and CLOs offered for sale over the first three days of this week totaled $4.3 billion.

Asset-backed bonds accounted for $1.3 billion of the offerings. All but $94 million found buyers.

Should new-issue volume increase in the weeks ahead, secondary-market sales actually could increase as bondholders seek to clear out existing allocations. “We are seeing a good amount of selling, but a lack of new-issue is really preventing that from really heating up,” another trader said.

It’s common for the flow of new deals to lag in the early weeks of January, when issuers already have addressed their yearend funding needs and industry participants in general are just returning from their holiday breaks. That said, the few new issues to make it to market have found solid demand after no deals priced during the first week of the year.

Take a $206.3 million offering of subprime auto-loan paper that Consumer Portfolio Services priced on Jan. 11. It included a subordinate class that fielded several times more orders than underwriters Citigroup and Credit Suisse could accommodate, one dealer said (see Initial Pricings on Page 10).

Hyundai also priced $1.1 billion of prime-quality auto-loan bonds on Jan. 10, with Bank of America, Citi, Credit Agricole and TD Bank running the books. That deal, which grew from an initial $810 million, included a class of 1.3-year senior notes with triple-A ratings that priced at 28 bp over eurodollar futures — after being marketed at an initial 31-33 bp.

Redwood Trust also sold $343 million of mortgage bonds on Jan. 11 via Wells Fargo. Discover was in the market this week as well, shopping two securitizations of credit-card accounts totaling $800 million.

CLOs so far this year have been restricted to refinancings (see article on Page 2). But dealers are talking to investors in advance of deals from issuers including CIFC, MJX Asset Management and Octagon Credit.