Tuesday, February 16, 2010

Global ABS/CDO Weekly Market Snapshot

Global ABS/CDO Weekly Market Snapshot
The certifying analyst(s) is indicated by AC. See last page of the report for analyst certification and important legal and regulatory disclosures.

Save the Date: April 15, 2010, J.P. Morgan Securitized Products Research Conference, 383 Madison Ave, NYC
Investment Themes: The ABS market remained solid this week. Short high quality bonds continue to trade very well. Riskier bonds
held up, although the aggressive bids that started the year have faded. We stay Overweight benchmark Consumer ABS as Treasury
surrogates. We recommend Overweight cash Subprime RMBS based on favorable loss-adjusted yields and technicals. On ABX, we
stay Neutral and would express that in a 06-1 trade to sell the PEN.AAA and buy the LCF.AAA.

This Week: US ABS. A $470mn Prime Auto Loan ABS priced this week. This brings year-to-date Auto-related ABS (Loan, Lease,
and Fleet) supply to roughly $7bn. In addition, the auto captives have been active in Dealer Floorplan ABS issuance with close to $4bn.
In total, year-to-date ABS volume stands at $14bn. Over the last two rounds (January and February), TALF loan subscriptions totaled
just $1.7bn across ABS (excluding $0.4 in Small Business), a sign of the program’s diminishing significance. The TALF program since
inception saw approximately $56bn in loan subscriptions for ABS. ABS spreads remained firm on the week with generally orderly and
stable trading across sectors. ABX prices were also unchanged on low volumes.
European ABS. It was a quiet week in primary European markets, with one structure-to-repo transaction from ING and a marketing
roadshow for a pass-through UK prime RMBS. Secondary markets saw some generic widening on the back of volatility in the
sovereign space, but more on observable prices as opposed to traded levels.

CDOs. CLOs emerged relatively unscathed from the week’s volatility. US CLO AAAs stayed at 215bp while AAs, single-As, BBBs,
and BBs were down only a few points to $82, $70, $60, and $45 as buyers stepped in. European CLOs are unchanged, though tiering
between stronger and weaker bonds is more pronounced. We note US investors are increasingly buying into the basis, and see
European single-As to AAAs as the primary beneficiaries. CLOs will not be impervious to heightened risk aversion, renewed sovereign
and policy risks, and the gradual withdrawal of monetary stimulus (e.g., China again raised its reserve requirement), but given the
relative value to comparables, we stay Overweight and point out the negative net supply which cushions against major price weakness.
Further, we recently proposed AAA CLO paper as a ‘safe haven’ trade to weather the volatility, à la Consumer ABS. So far this has
proved to be the case, with tighter AAA spreads and Super Senior bonds moving to inside 150bp, within striking distance of our
midyear 100-150bp spread target. However, the strength in US CLO equity is interesting. Strong performers are well bid by those
seeking higher yields, and in some cases investors are paying 3-4 years of cashflows for performing US CLO equity, implying prices as
high as the $50s-60s (lower for non-performers). At these levels, pricing takes the view of incremental improvement in O/C and excess
spread, particularly as existing CLOs reinvest in primary loans issued with historically wider spread margins. We broadly agree, but
point out the transaction-specific risks of this strategy.

In the News: Fitch upgraded three subordinate classes of FORDO 2007-A by one category and affirmed the seniors at AAA. Moody’s
upgraded various tranches of AMCAR 2005-2006 transactions. S&P upgraded 2008-1 subordinates and affirmed 2009-1 classes of
Huntington Auto Trust ABS. FULL REPORT HERE
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