The New Year Brings Tightening Spreads, Autos and a Surge


Though the asset-backed market showed little signs of life the past few weeks - as pickings were slim to none - issuance crept much further into the fourth quarter than predicted just a few months back.

Sallie Mae priced a $2 billion student loan-backed deal just a few days before Christmas (see story page 16).

The secondary market showed only a slight slow-down, as trading continued further into December than in some previous years, according to market sources - all of which points to a healthy first quarter.

"The secondary market is going to remain strong," said Paul Varunock, vice president and analyst at Prudential Securities. "We stayed strong all the way until a couple days before Christmas. On the 23rd it kind of died out, but up until the 22nd, secondary trading was still going, and typically in the Christmas week things are pretty dead."

The Brave and the Mighty - GCM

Aside from Sallie Mae's $2 billion shock-value sale, just a few new deals hit the market mid-to-late December.

New Century Financial Corp. priced a $218 million home equity deal just before Christmas. Greenwich Capital Markets managed the one part transaction. The sole, 3.42-year, $218 million A-class was insured by Financial Security Assurance and rated triple-A across the board.

According to published reports, First City priced a $73 million auto-backed deal, structured as a Rule 144A, also through Greenwich Capital Markets.

The First Quarter

The general feeling right now, as expressed by several analysts, is that the asset-backed market will see heavy issuance in February, minus the few quiet days when most market participants will be attending the industry conferences (see Calendar, p. 15).

"Additionally, interspersed in there, you have a Fed meeting the first week of February," Varunock said. "I think that will slow down secondary trading more than it will new issuance, because the issuers are going to be in the market anyway."

Not only do analysts predict a healthy first quarter, but because (as it's generally believed) many issuers held back during the fourth quarter, which was down nearly 10%, the first quarter market could experience a surge.

Going into January, we'll likely see deals from the major auto manufactures, Varunock said, including Ford, Daimler Chrysler and perhaps GMAC - none of which were in the market fourth quarter.

As to when the ball will start rolling, "[this week] is a little soon," he predicted. "Other than maybe something that's easy to bring, like a credit card issue, I wouldn't expect to see too much [this] week."

Spreads look to be consistent going forward.

"Most of the people I talked to think that spreads are going to tighten in further," said Varunock. "Swaps remain firm, and after Y2K - if this proves to be nothing more than another New Year, the tightening that began back in mid-November should continue on."

"The most value that you're going to see out there going into the first quarter still remains the off-the-run-sectors and the subordinated sectors," he said. "And those still have the best yields. Credit curves in the home-equity, manufactured housing markets still remain at historical steeps, and I think there are a number of factors out there that should flatten that credit curve."