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Subprime mortgage securitization has been so scarce in recent months that so far there are not enough deals available to cobble together a new ABX series, said Ben Logan, a managing director at Markit Group, the index’s administrator. The index is slated to launch its 08-1 series on 21 January, but there are currently fewer than 20 outstanding subprime securitizations from the second half of this year that meet the index’s criteria.
The deal drought reflects the demise of the subprime lending boom and should mark the end of the ABX as well, said two buysiders and an industry observer.
Even if the ABX continues past the 07-2 series, a proxy for subprime RMBS bonds originated in 1H07, liquidity in the index may begin to dry up, said some buysiders. That threat could accelerate selling out of the index as participants look to close out trades while they can. Unlike credit default swaps referencing corporate bonds, which generally have a five-year maturity, asset-backed CDS in the format used for ABX trades have a matched maturity to the life of the securities they reference – which can be substantially longer.
New short sellers may be dismayed because upfront premiums for such trades rise as the price of the index declines, said a sellside source. “Most of the selling today has been in A’s as the price is higher and few people want to short BBB’s at these upfront premiums,” said the source.
The BBB- pieces across the ABX indices traded at all time lows on Friday after Moody’s Investors Service announced USD 33.4bn in subprime ratings downgrades. The 07-2, 07-1, 06-2 and 06-1 BBB- dropped 1.50, 1.50, 1.00 and 3.00, respectively to 30-35, 26-29, 27-30 and 45-48, according to the sellside source. The ABX A was down 2.25, 5.00, 3.75 and 3.00 Friday morning to 81-84, 58-61, 40-43 and 53-58 across the 06-1, 06-2, 07-1 and 07-2 indices, respectively.
The launch of the ABX in January 2006 exponentially increased the amount of speculative investors betting that the subprime mortgage market – and the cash bonds tied to those loans – would head south. Price moves in the ABX added to volatility in cash bond pricing and eventually became a benchmark for many investors looking to value their own holdings amid a sluggish secondary market devoid of true pricing levels.
However, interest in newer series’ has begun to fade. “Nobody even trades the 07-2, so why create another one that nobody cares about?” asked one buysider active in the ABX. Added another ABX investor, “I don’t think there should ever be an 08-1 series. Subprime is dead.”
The TABX, which tranches ABX BBB and BBB- pieces and was created to simulate a mezzanine ABS CDO, is already defunct, said Mark Adelson, a securitization consultant at Adelson & Jacob consulting. “The TABX is for all intents and purposes pretty much dead. It’s toxic – nobody wants to touch it anymore,” Adelson said.
In order to launch a new series, the ABX requires a pool of at least 20 subprime securitizations launched within the last six months and totaling more than USD 500m with an average FICO score of less than 660, among other criteria.
So far, only USD 9.9bn of home equity loan securitizations have come to the market since 1 July – a 95% decline from the USD 200.9bn in the first half of this year and a roughly 92% decrease from the same time period last year, according to JPMorgan Chase.
If the subprime securitization market remains frozen, the ABX 08-1 series could be kept alive by postponing its launch to a later date, reducing its size, or allowing a wider array of underlying deals, such as alt-A securitizations, Logan said.
Among other key requirements for inclusion in the index: the securitization must have AAA, AA, A, BBB and BBB- rated tranches issued within the last six months;. at least 90% of the mortgages backing the transaction must have a first priority lien; the AAA tranche must total at least USD 15m and have a weighted average life of greater than five years and other tranches must have at least a four year maturity, according to Markit index rules.
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