Spreads Widen, Stomachs Turn

Roughly in step with other markets, structured finance pricing and issuance in June was governed by questions of how quickly the Federal Reserve would rein in its asset-buying spree.

"Faster than we thought" was the queasy market-wide answer to Fed Chairman Ben Bernanke's speech on June 19. Rates correspondingly jumped.

They had already begun to rise in earnest during May. Through early June, spreads across the asset-class board edged out, with some products faring better than others.

"ABS held up best, especially on-the-run [segments]," said Harris Trifon, a research analyst at Deutsche Bank, referring to the rise up to mid-month. Prime auto deals and credit cards were particularly stable, seeing spread widening of only several basis points.

CMBS, in contrast, saw more pronounced widening in the weeks to mid-June, in part due to the active primary market.

Trifon said that CMBS spreads had moved out through the capital stack while rates on the underlying collateral rose. Allowing for the variation inherent in the commercial real estate sector, coupons on loans were probably about 50 basis points higher in mid-June than they were a month earlier. For some properties, the figure ran as high as 100 basis points.

Repeat Issuers, Off the Run Equally Affected

Market sources said that the 2013-3 subprime auto deal issued by General Motors Financial Services on June 13 came out wider than its last deal, an example of repeat issuers that were getting nicked. Even obscure, off-the-run deals were impacted. As triple BBBs in a range of structured products had come out about 30 basis points from recent lows, Iconix priced a securitization of license fees at 4.375%, wide of the 4.3525% coupon and outside the price guidance of about 4.25%.

But the company chose to upsize the deal to $275 million from $250 million, a clear indication that it was not shrinking from these higher rates as well as a reminder that yields are still very much near historical lows.

"The market had come very far," said a market source at mid-month. "It's retracing a bit, and it'll probably trade in a range."

Then on June 19, re-tracing got a jolt.

Bernanke confirmed anxieties about the looming end of quantitative easing. This exercise in rate suppression, he said, could end by mid-2014 provided that growth continues to gather steam. Markets tanked and the yield on the 10-year Treasury spiked to 2.54%, its highest since August 2011. In a June 21 report, securitization analysts at Bank of America Merrill Lynch characterized Bernanke's speech as "very hawkish"; they weren't alone in that reading.

Structured finance pros were rattled along with everyone else. The sensitive CMBS sector saw new issue duration-hedged triple BBBs come out some more, with widening having reached 125 basis points in the two months up to June 21, according to a report from Barclays analysts.

Public new issue CMBS widened out by 7-10 basis points over the week to June 21, while new issue mezzanines gapped out by 15-25 basis points, said BofA Merrill analysts. Class B and A credit card and prime auto deals, again, held up better than most products, inching out a few basis points.

Issuance Likely to Slow

How hard this would ultimately hit issuance was hard to say. Deals like Shellpoint Partner's long-anticipated private-label RMBS was marketing at press time, and Standard & Poor's was quick to point out, post-Bernanke, that the week of June 19 saw healthy volumes overall.

The agency said that U.S. ABS issuance was about $100 billion in the year through June 21, with U.S. RMBS approaching the $10 billion mark. But no one appears to think that this rhythm could be sustained.

"The biggest effect of wider spreads, higher yields, and increased volatility will be to slow the pace of issuance in H2, in our estimate, especially for U.S. CMBS," S&P said.

Indeed, the agency welcomed a slowdown in CMBS issuance, calling such a prospect a "mild positive" in a June 21 release. It projected about $16 billion of new deals from July through September, a retrenchment from the rate in 1H. The agency saw little chance of a pickup in Q4 with loan origination in commercial real estate likely to slow.

BofA Merrill analysts also saw silver linings for some structured markets: "Higher yields stand to deepen the investor base for MBS, most notably for banks and insurance companies."

The higher volatility induced by Bernanke "will keep many investors on the sidelines until the proverbial dust settles."

For both issuers and investors alike, the operative word this summer might be "windows": Watch out for them and be ready to jump (either into the market or out, depending on where you stand).