EXTRA CREDIT: Consumer Loan-Backed Market Grinds To A Halt

8th Jun 2010 20:19

By Anusha Shrivastava A DOW JONES NEWSWIRES COLUMN NEW YORK (Dow Jones)--There's a deafening silence in the consumer loan-backed bond market as broader market volatility and regulatory changes have muffled the sale of new issues, which help credit flow in the economy. No new bonds have been sold in this $700 billion market in two and a half weeks, and only $52 billion has been sold so far this year. At this pace, issuance for the year likely will fall short of the $140 billion forecast in January. That would be comparable to the amount sold in 2009, but far below the $700 billion sold in 2006, according to Asset-Backed Alert, a trade publication. Even as supply has fallen, however, so have prices. Risk premiums--the extra returns investors demand over comparable super-safe Treasurys--have widened by about 0.15 percentage points on top-rated tranches and by 0.50 to 0.75 percentage points on riskier triple-B portions. Wider spreads suggest bond values have fallen. "We have retraced six months of tightening in the past four weeks," said Christopher Haid, director and asset-backed securities trader at Barclays Capital in New York. "In terms of spreads, we are seeing levels similar to those back in the second week in January." Spreads on new deals have widened as much as 0.20 percentage points, said Paul Jablansky, senior ABS strategist at the Royal Bank of Scotland in Stamford, Conn., noting that is because of a "fair amount of market volatility." Not only are there worries over euro-zone debt, there are also concerns about the tension in Korea and uncertainty about economic growth in the U.S. Adding to that is a recent change in Securities and Exchange Commission rules governing disclosure to rating agencies. As per the new rules, issuers must share information about deals even with rating agencies they have not hired to grade the deals. "Issuers are hesitant to be the first to go through the new rating agency regulatory process," Jablansky said. Other rule changes include the proposal for issuers to retain a portion of all new bonds as a risk-retention measure. Industry participants are wary of estimating how much issuance could fall by. That said, they think new bonds could emerge once issuers are more confident about the rule changes and about growth in the economy. "There's a temporary lull and it won't be permanent," Jablansky said. "It could be a few weeks." Overall ABS issuance could fall as consumers cut down on spending "so the need for securitization is down," Haid said. The most recent deal sold in the consumer ABS market was Navistar Financial Owner Trust, with a $919 million auto-sector bond that sold on May 21. It was the first bond to be hit by the unease that investors were feeling, as euro-zone worries deepened. Navistar's deal priced at wider risk premiums than the company expected and the company "retained" the lowest-rated portion of its bond, meaning it withdrew that tranche from sale. If the market volatility persists, the impact will be felt for a longer period of time, Jablansky noted. Separately, he said, issuers are seeking alternatives, tapping the asset-backed commercial paper market. The ABCP market had also undergone a decline but it is not plummeting any more. "That will see some volume," he said, adding spread levels have tightened in that market. (Anusha Shrivastava covers asset-backed securities and commercial paper for Dow Jones Newswires.) -By Anusha Shrivastava, Dow Jones Newswires; 212-416-2227; [email protected] TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires June 08, 2010 15:19 ET (19:19 GMT)