Dealer shelf transactions are becoming a more significant slice of the U.S. asset-backed market, as tight bond spreads allow investment banks to bid aggressively on collateral pools and securitize them at attractive levels. High bond prices are allowing firms such as UBS Securities, Barclays Capital and Deutsche Bank to provide financing for their corporate clients by purchasing pools of loans, which they later package into a securitization. By some accounts, dealer shelf sales account for roughly half of the subprime mortgage deals sold this year, up from for 35% of last year's total, according to Moody's Investors Service. The trend is noteworthy because the sector, at $200 billion in issuance last year, is by far the market's largest. Sub-prime mortgages are not the only loans being sold through dealer shelves--auto loans are increasingly being sold directly by dealers and participants expect this year to see an increase in this type of issuance.
"Right now it's a very hot market for [acting as principal on] mortgages and non mortgage-product," says Shahid Quraishi, managing director and head of the asset-backed business at UBS. The firm last week executed a $670 million sale of Option One Mortgage collateral off its shelf.
In these offerings, investment banks act as issuers and underwriters. The loan originator often still services the underlying loans, but in some cases, banks are retaining new, higher-rated servicers.
Several factors are at play. Investment banks want to provide as many financing options as possible to corporates, which for their part want to turn over as much mortgage product as possible while rates remain low and cannot rely on tapping the securitization market with a term deal under their own banner every week. "The increased activity from dealer shelves is principally due to the strength in origination volumes; originators are looking for consistent sources of liquidity," says Mike Wade, managing director and head of asset securitization at Barclays. The firm sold its first dealer shelf transaction last week, SABR 2004-OP1, a $1.7 billion offering pooling Option One loans. SABR stands for Securitized Asset-Backed Receivables.
An added bonus for the banks is they act as sole underwriter on the deals sold under their shelves and therefore do not have to split bookrunner fees, as they would in a traditional deal. But, this could create liquidity issues if prices weaken because dealers may not want to make markets in competitors' offerings. "It's hard to verify now, but there is certainly the perception from investors that secondary trading tends to be done only by the lead manager," acknowledges one sell-sider.
However, one buy-sider says investors can benefit because banks are selling deals that they are first taking onto their own balance sheets and tend to be more diligent than originators in excluding loans from the pool. "In many cases, I like the shelf better. I could buy New Century [Financial], or I could buy New Century from Morgan Stanley that haircuts it because they kick out stuff that wouldn't get kicked out," he explains. But, he cautions that not all shelves are created equally.