Asset-backed issuers are increasingly slicing and dicing the classes of the securities they sell to make them better appeal to investors at a time when volumes continue to set new highs. Originators and rating agency officials say the trend, dubbed hyper-tranching, is noteworthy because innovation in mortgage-related structures has been limited to date given the strong demand for bonds. But this balance is shifting amid the roughly $170 billion sold in the U.S. market during the first quarter. And sub-prime mortgage issuers--the lion's share of the market--are now tailoring their offerings to meet investor demand. Market pros expect the trend to only increase as issuers continue to pump out paper.
"There hasn't been a lot of innovation because there hasn't been a great need, but with the massive amount of volume, [issuers] are thinking more and more about how to reach investors and create demand," said Henry Engelken, v.p. and senior credit officer at Moody's Investors Service.
One case in point is a recent sale by prominent issuer Ameriquest Mortgage under its Argent shelf. The deal featured 17 classes, according to one analyst. Officials from Ameriquest could not comment by press time.
In an example of hyper-tranching, a deal that would ordinarily be sold with a traditional six-pack structure would be split into many separate classes. For example, a triple-B class could be divided into three tranches, with triple-B plus, flat and minus bonds created. "An investor might not want to go to triple-B, but he might take a triple-B plus. There's a lot of volume so you are trying to maximize your investor base," explained one banker who has used the hyper-tranche structure.
The structure, however, means that each class will naturally be smaller, which could result in poorer liquidity for the bonds. Moody's also believes that smaller classes increase loss severities and requires higher enhancement levels for smaller classes, according to Engelken.
