Guggenheim Investments
Structured Credit Review
May 2015
Structured Credit Review As of May 2015
ABS
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May ABS performance was positive and outperformed the
overall bond market. The BofA Merrill Lynch AA-BBB U.S.
Asset Backed Securities Index gained 21 bps for the
month while the BofA Merrill Lynch U.S. Broad Market
Index fell 24 bps. Spreads on the BofA Merrill Lynch AABBB U.S. ABS index were 1 bp tighter on the month at
146 bps, while ABS benefitted from shorter duration as
rates markets widened. CLO total returns as measured by
JP Morgan’s CLOIE indices for post-crisis issues were
positive for the month, with gains from 27 bps at AAA
through 155 bps for BBB tranches.
New ABS issuance for May totaled $22.7 billion per
SIFMA, down from $22.1 billion in May 2014. New ABS
issuance was more weighted to esoterics, with $10.2
billion auto, $2.8 billion credit card and $4.4 billion esoteric
ABS. While prime auto securitizations picked up
substantially in May, subprime auto deals slowed from a
historically prolific first quarter. JP Morgan Research
shows U.S. CLO issuance of $6.6 billion for the month,
down 42% from April. Limited supply of loan collateral was
the main driver of reduced CLO issuance. Eight post-crisis
CLOs refinanced in May – a monthly a monthly record – as
managers and equity holders sought to benefit from tighter
liability spreads.
Credit performance across the commercial ABS and CLO
sectors remains favorable given the benign credit
conditions and collateral valuations across the U.S.
economy. Consumer ABS credit performance is expected
to show modest deterioration from strong levels as
underwriting standards loosen and subprime originations
increase share. Corporate defaults are expected to rise in
2015 led by the energy sector, under continued pressure
from low oil prices, as well as increasingly aggressive M&A
activity and related corporate financing. Overall, U.S.
economic performance is expected to be strong and
supportive of credit performance.
Non-Agency RMBS
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The Non-Agency RMBS market showed neutral performance in
May with the J.P. Morgan Non-Agency Index returning 40 bps
for fixed-rate prime and Alt-A RMBS and 20 bps for subprime
RMBS. Synthetic benchmarks posted similarly tepid
performance as the ABX.AAA Indexes, backed by subprime
RMBS, ended the month up 20 bps.
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Trading volumes in May were moderate – approximately $2.5
billion/week – and dealer inventories grew by roughly $750
million. Three new issue private-label deals, backed by
approximately $2.1 billion of recently originated loans to fully
documented borrowers with excellent credit histories, came to
the market. Approximately $2.3 billion of non- and reperforming loan backed RMBS deals were also placed in May.
The GSEs issued one credit risk transfer deal consisting of
investment grade and non-rated floating rate tranches which
reference approximately $45 billion of mortgage loans
originated in late 2013 and early 2014.
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Housing data was generally positive in May. The Case-Shiller
20-City Composite showed a year-over-year increase of 5.0%
and a stabilizing rate of appreciation. The forward looking
indicators of housing starts and building permits reversed their
weak results of the past few months and printed month-over
month increases that exceeded consensus expectations. New
home sales roughly met expectations and stand 22% higher
than May 2014. Pending home sales showed a strong increase
(up 13% year-over-year), which, when viewed with the
historically low 5.3 months of listed inventory, provide a positive
climate for the upcoming spring and summer months. Existing
home sales, on the other hand, missed expectations with a 3.3% change month-over-month but remained in the 4.8 to
5.2mm/yr range observed over the last 12 months.
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Mortgage loans showed reduced prepayments speeds in May
in lagged response to rising mortgage rates in February and
March, with the effect most pronounced in higher credit quality
loans. The balance of delinquent loans also fell across the
Non-Agency RMBS universe. Loss severities and liquidation
rates were roughly unchanged despite the population of
distressed loans slowly shifting toward states with expensive,
slow-moving judicial foreclosure processes. The climate of low
interest rates, stable employment, and improved homes prices,
combined with ongoing credit curing of mortgage collateral
continue to provide constructive tailwinds for mortgage credit
performance, particularly in the more credit sensitive Alt-A and
subprime subsectors.
CMBS
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Cash conduit spreads were roughly unchanged in May. New
issuance volume across conduit, single asset / single
borrower and CRE CLO was approximately $7 billion. Total
2015 YTD private-label issuance comes in at $40.7 billion,
47% higher than the same period in 2014.
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Recently, conduit CMBS transactions have excluded ‘major’
rating agencies from subordinate CMBS debt tranches. The
practice of selectively choosing whether to include a ‘major’
rating agency, or ‘ratings shopping,’ has coincided with
increasingly aggressive loan underwriting in conduit CMBS.
Guggenheim does not believe loan underwriting has reached
pre-crisis standards, however we note that ‘ratings shopped’
transactions generally feature less credit enhancement and
price up to 15 bps wide of those transactions where ‘major’
rating agencies are included.
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The mix of loan originators in conduit CMBS has also
changed since early post-crisis deals. Recently, loan
contributions to CMBS deals from smaller, non broker-dealer
originators have increased to as much as 50% of total
transaction collateral in 2015 from a low of 9% in 2011.
Guggenheim’s underwriting of loans from both broker-dealer
and smaller originator cohorts suggests that smaller
originators tend to more aggressively compete on
underwriting terms and loan amount, where broker-dealer
originators tend to compete using more aggressive loan
interest rates.
Please see disclosures and legal notice at end of document.
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Disclosures and Legal Notice
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