US structured-finance volume jumps - but so does risk

NEW YORK, Sept 14 (IFR) - The US structured-credit market exploded with issuance this week, as 24 transactions across ABS, RMBS, CMBS, and CLOs sent investors into a feeding frenzy.

More than $15 billion in deals were either priced or announced, and several more new issues are in the queue for Monday.

With the Federal Reserve's low interest-rate policy now extended out till at least 2015 -- and a good deal of buy-side cash chasing assets -- investors pounced on anything that provided even a modicum of extra yield.

"We've seen an extraordinary amount of issuance compressed into a very short time span, no doubt encouraged by high investor receptivity to structured product given expectations of low base rates and volatility," said Christopher Sullivan, the chief investment officer at the United Nations Federal Credit Union (UNFCU).

"The demand for spread has risk assets very much the focus, especially in this new and now newly-extended era of financial repression."

Twelve asset-backed securities transactions worth $9.2 billion, mostly auto-related, were marketed to investors, with several achieving impressive oversubscription levels and the tightest spreads in five years.

This was the busiest week of issuance all year; the first week of June was the second busiest, at $8.6 billion, according to IFR Markets data.

Securitization analysts say that there is a chance that US ABS issuance may surpass $200 billion this year - the highest volume since the onset of the financial crisis. Year-to-date volume stands at more than $137 billion. Total 2011 ABS volume was about $128 billion, versus $135 billion in 2010.

By comparison, total ABS issuance, including lower credit quality mortgage ABS, hit a record of $1.25 trillion in 2006, according to the Securities Industry and Financial Markets Association.

AUTOS DRIVE ISSUANCE

Robust car sales have promoted a spike in auto financing. Investor demand for auto ABS is so strong, all down the capital structure, that all-in yields have reached record lows on several recent deals.

Three subprime auto deals surfaced this past week from issuers Exeter Finance Corp., CPS, and Credit Acceptance Corp. Meanwhile, Daimler Chrysler and USAA each issued prime retail auto transactions.

The USAA trade achieved a record post-crisis low yield of 0.23% on the money-market tranche.

Ally also issued an auto-lease transaction, and Ford sold a pair of auto dealer floorplan offerings.

"We are seeing prime ABS auto deals with pre-crisis spread levels," said Brian Wiele, the head of the Americas securitizations syndicate at Barclays. "That shows quite a significant recovery for them.

"There are not many great alternatives for very high quality, short duration, and higher yielding assets out there. This is quite a desirable asset class," Wiele said.

Meanwhile, California-based REIT Redwood Trust marketed its fourth private-label RMBS of the year, the $313.2 million Sequoia Mortgage Trust 2012-4, which was underwritten by Barclays. It is the company's seventh post-crisis RMBS, and only the ninth post-crisis private-label deal overall.

Vericrest Financial, a privately held residential-mortgage servicer, also marketed a rare $156 million RMBS, titled VOLT 2012-NPL2.

In collateralized loan obligations, LCM Asset Management, Valcour Capital Management, GSO/Blackstone and Invesco each circulated and priced deals this past week.

Finally, a whopping $8 billion of CMBS is expected to inundate the market over the next month -- the highest monthly volume since 2007.

Six deals, or about $3.78 billion, were marketed this past week, and sources say the paper was easily absorbed.

RISK TOLERANCE HIGHER

With commercial real-estate lending much more competitive than it was two years ago, investor risk tolerance has risen, as several buyside sources noted significantly riskier collateral showing up in CMBS deals.

A UBS/Barclays conduit, for example, contained loans for regional malls in secondary US geographical markets -- considered to be highly dodgy.

"All it takes is for one mall to go bad, and the B piece buyer on the transaction is wiped out," said the head of CMBS investing at one of the largest asset managers in the country.

Another conduit from Citigroup and Goldman Sachs included a loan for a Miami mall whose underwriting assumed that tenants would be able to pay future increases in rent over the next five to ten years.

Another loan in the deal was underwritten to include a building that had vacant Manhattan office space -- with no promise that the space would be leased up over the term of the loan.

Market participants agree that risk is increasing but is still nowhere near the levels seen in pre-crisis deals. The fact is investors have limited options for where to put their money.

Moreover, as the number of outstanding CMBS bonds has decreased over the last two years -- pushing the net supply of the securities lower and lower -- investors have had fewer bonds to bid on, and even fewer alternative asset classes that offer similar yields.

That has created an aggressive investment climate leading to the tightest new-issue CMBS spreads seen since 2007. For instance, despite some investor reservations about the retail/mall component of the UBS/Barclays conduit, a 10-year, Triple A slice of the transaction priced today at 95 basis points over Swaps -- the tightest spreads seen on similar tranches since the post-crisis CMBS market revived in late 2009.

"It is a competitive lending environment; as people see deals oversubscribe, investors have a herd mentality," said Sagar Parikh, a CMBS trader at TCW. "The intense interest in these deals is a product of the environment."

"Investors mainly understand they're not being adequately compensated for risk, but then they're afraid of not being in the game because there's just no other viable way to perform," said UNFCU's Sullivan. "And so it goes, until it ends."

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