The structured finance market recorded another banner year in issuance, with total U.S. asset-backed issuance approaching the $400 billion mark in the final weeks of the year. Even if the final number comes in below that threshold, more asset-backed bonds will have been sold this year than in any previous year in the adolescent market. The supply was headlined, of course, by home equities, which tallied close to $200 billion amid a refinancing boom, to make mortgage-related ABS far and away the largest part of the market. Credit card and auto loan securitizations round out the top three slots, with roughly $70 billion apiece in those two sectors. And, despite a lack of arbitrage in high yield repackagings, the market for which all but shut down, the collateralized debt obligation market expanded to include other underlying assets and experienced roughly $55 billion in sales, according to data from Credit Suisse First Boston. That figure is flat to last year's total.
Despite the abundance of paper, bond prices largely held steady or rallied. The Lehman Brothers ABS Index outperformed similar Treasuries by 166 basis points as of the end of November, its largest outperformance ever as demand outpaced supply. New investors, such as managers seeking to structure asset-backed CDOs as arbitrage in the high yield market faded, ramped up structured finance CDOs, providing a floor for prices across the capital structure. Other buy-siders, such as Thrivent Financial for Lutherans and a proprietary arm of Fortis, the Belgian bank, either were thinking about investing more in structured finance or did commit increasing levels of capital to the market (BW, 10/6 and 11/10).
Innovations were aplenty, including Sallie Mae's introduction of a reset rate note early in the year, which made student loan paper more attractive (BW, 1/27). The government-sponsored entity sold a dozen or so deals this year, its most ever, as it expanded its investor base in preparation to shed its GSE status.
Partly as a result, student loans emerged as a growing asset class. New lenders, such as the Pennsylvania Higher Education Assistance Authority (BW, 9/1), began to issue their first term securitizations as the investor base widened and tight spreads provided for attractive funding levels. But the good news in student loans was somewhat tempered by legislation on Capitol Hill that could introduce prepayment risk into deals backed by consolidation loans (BW, 7/7), which made up more than half of the collateral repackaged this year.
On the cash CDO side, managers such as American Capital Access began structuring CDOs with triple-A money market classes, which appealed to a wider investor base and allowed them to bulk up transactions with high-quality paper (BW, 9/27). Liquidity was the main topic among CDO professionals and was jumpstarted early in the year when Pacific Investment Management Co. liquidated Abbey National's portfolio. Since then, several factors such as an increased personnel commitment from Wall Street, and improvements in analytical tools and transparency all contributed to secondary spreads trading near new issue levels (BW, 11/10).
But, the market was not without its troubles and servicer risk continued to be an issue. Medical equipment financier DVI Inc's bankruptcy a few months after it sold triple-A bonds (BW, 8/11) and the downgrade of Fairbanks' servicer rating underscored that assets can never be completely removed from the issuers that sell them. Meanwhile, CDO downgrades continued to outpace upgrades by a wide margin.
