Lehman Brothers is starting a floating-rate asset-backed index later this quarter to meet the changing nature of the structured finance market. "We didn't have an index for this asset class and we decided to launch one," said Steve Berkley, head of Lehman's index group. He added: "Three hundred and fifteen billion is a lot of reasons to do it," referring to the value of the bonds to be included in the floating-rate index.
The index titan currently maintains a fixed-rate index for asset-backed securities, but the market has steadily gravitated toward one dominated by floating-rate bonds and an index that excluded them missed a huge chunk of the market. In fact, home equities accounted for more than 60% of last year's roughly $858 billion in public and private supply (including collateralized debt obligations), according to Deutsche Bank research. Lehman's new floating-rate index will be run separately from the fixed-rate one, which will continue to constitute the asset-backed portion of Lehman's widely used Aggregate Bond Index, Berkley said. Investors benchmark more than $2 trillion against it, he added.
Although matching the home equity market's supply in recent years would have meant an off-index bet, one researcher said he doesn't expect the new floating-rate index to have a significant impact on spreads. "Floating-rate execution is already very strong, but I do think the index will boost liquidity," he noted.
The new index will start with a 42% weighting to home equities, 34% in credit cards, 19% in student loans and 5% in autos, according to a Lehman official. In the fixed-rate index, meanwhile, autos constitute 26%. The new index will exclude private sales, deals less than $500 million and individual classes below $25 million.
