Mid-Year Market Review


By John McElravey and Glenn Schultz, directors and senior analysts of the asset-backed securities group, Banc One Capital Markets, Inc.

Activity in the asset-backed securities market slowed slightly in the second-quarter from its record setting first-quarter pace. Total public ABS issuance reached $49.3 billion, down from the $50.8 billion in the 1999 first quarter.

Total new ABS volume for the first half of 1999 was equal to last year's level of $100 billion. Banc One Capital Markets projects total ABS issuance for 1999 at $193 billion.

Rising credit spreads over the last six weeks hurt ABS issuance. Concerns about the direction of interest rates and the extent of potential tightening of monetary policy by the Federal Reserve weighed on investors at the same time that quarter-end transactions approached.

The typical seasonal pattern of rising volumes into quarter end has been thrown off in the first half of this year. February and May saw issuance well above average, while new issue volume in March and June were at or below the average level of the past four years. Shifting market conditions over the past few quarters have contributed to issuers making adjustments to the timing of new issues, moving them away from the usual quarter-end rush.

While the dollar amounts over the last two January-to-June periods are the same, the composition this year is much different (see chart below). Consolidation produced the same volume, but from far fewer issuers in areas such as manufactured housing and credit cards. Furthermore, lower levels of home equity and student loan ABS have held back the market.

Nevertheless, strength in the auto ABS sector, which is running 29% ahead of last year's pace, is a reflection of the healthy underlying state of the auto market. Auto ABS accounts for 23% of total year-to-date new issue volume.

This increase in auto ABS has offset weakness in the residential ABS sector. Total new issue volume is 16% below last year's mark. Transactions backed by high loan-to-value loans are only about one-third of their year-ago level. However, transactions backed by home equity lines of credit have more than doubled to $2.4 billion year to date.

Despite the overall slowdown in the residential ABS market, this sector maintained its place as the market's largest, capturing 30% of all new ABS product.

At this point last year, the residential ABS sector produced 88 transactions from 43 different sponsors. In the first half of 1999, 70 transactions from 38 sponsors priced.

Going below the surface of the aggregate figures reveals another aspect of the financial consolidation story. There are only a net of five fewer issuers, but the specialty lenders (Aames, Amresco, First Plus, The Money Store, Southern Pacific and United Cos. Financial Corp.) have been replaced by larger consumer finance companies, especially banks (like Bank One, Chase Manhattan Bank, Fremont Bank, KeyCorp and Mellon Bank).

To some extent, this shift is similar to the events seen in the credit-card market, where larger competitors have come to predominate.

Looking forward, the Fed's actions two weeks ago removed an important source of short-run uncertainty for market participants. An improved market environment is especially good news for issues, as Y2K hysteria will begin to come into play in the third quarter.

We expect above average volume in the month of July as issuers shift transactions forward in the quarter to avoid potential September spread widening.

Quarter-End Spread Analysis

The second quarter of this year witnessed a spread tightening move that rivaled that of the first quarter.

For the most part, spreads tightened between 20% and 30%. In the short tenors, both the mortgage-related and stable cash flow sectors enjoyed comparable spread tightening on a percentage basis. However, measured on an absolute basis, residential ABS spreads tightened slightly more than the stable cash flow sectors.

Overall, we believe that the ABS market offers investors exceptional relative value and expect the sector to demonstrate a tightening bias toward the 52-week moving average.