KT, here is some weird article. I thought everything was fine in US (and gold sucks).
Market Fears Are Spreading
To Asset-Backed Securities
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
The asset-backed securities market -- where investors take comfort that their bonds are backed with collateral ranging from mobile homes to future royalty payments on David Bowie songs -- for years has been a beacon of stability. Despite a rally in recent weeks, that may be about to change, as fears about the health of the market spread beyond sectors whose difficulties are well-known.
In 2002, there were some shocks, but they were easy to dismiss. "Last year's problems were at the periphery," says Mark Adelson, head of ABS research at Nomura Securities in New York. "This year, the question is whether the problems are reaching the core of the market."
Some concern on the part of analysts and investors reflects continuing economic weakness and some arises from complicated legal judgments as more issuers of asset-backed bonds apply for Chapter 11 bankruptcy-court protection. Also, many sectors in this market are young and haven't weathered a sustained downturn until recently.
"The consensus assumes that the ABS market is a safe and sound asset class," says Christopher Wood, equity strategist for Credit Lyonnais Asia Securities. "But it is an elaborate cocktail of unquantifiable credit risk which has not been stress-tested."
The concerns start on the macroeconomic level. Household debt as a percentage of disposable income climbed to a record 106% in the fourth quarter. "Generation-low interest rates are being offset by the sharp run-up in debt accumulation," notes David Rosenberg, Merrill Lynch & Co.'s chief North American economist. Moreover, unemployment has climbed to 6%, the highest level in almost a decade, and personal bankruptcies peaked at an all-time high of 1.5 million in 2002.
With that as a backdrop, can a market where the bonds are backed by cars, credit-card bills and other items on which debt-laden consumers splurged remain immune from the growing pressure?
For so-called prime deals, those backed by debt taken out by the most credit-worthy borrowers, the market is still "a safe haven for the risk averse. The returns and the ratings are very stable," notes Anthony Thompson, a managing director and head of research on U.S. asset securitization and global collateralized-debt obligations at Deutsche Bank Securities in New York. Indeed, these bonds have rallied strongly over the past six months. But for everything else, returns have been more volatile, he adds.
"There has been a protracted decline in demand for subprime credits," Mr. Thompson adds, referring to deals backed by credit-card obligations and car loans to less credit-worthy consumers.
Analysts say it has been very hard to get deals done without some sort of insurance guaranteeing investors that they will be repaid regardless of the fate of the issuer and the performance of the underlying payment flows. Even with the rally, lower-quality deals have had to offer investors more generous yields than six months ago, although it is hard to generalize just how much more since the levels can vary widely depending on the individual name.
Last year, the total value of deals in the very-low ratings category of double-C amounted to $12.3 billion. Through the third week of May, an additional $4 billion had been downgraded to this quasidefault level, according to data from Deutsche Bank AG. A quasidefault level suggests that the deal is in violation of some technical terms.
To be sure, the level of troubled deals remains small in a market totaling $1.5 trillion, analysts say. Indeed, in an indication of just how safe and steady this market has traditionally been, Moody's Corp.'s Moody's Investors Service is only now working on its first default study. McGraw-Hill Cos.'s Standard & Poor's, which does track defaults, says there were 20 defaults in this year's first quarter, more than the 18 for all of 2001. Last year, S&P counted 63 defaults.
"The trends are significantly worse than our expectations," says John Olert, a managing director in the financial-institutions group of Fitch Ratings, a unit of Fimalac SA. "We are downgrading both the companies and the deals in these sectors."
Credit-card deals showing strains include some put together by Metris Cos., with $8 billion in asset-backed securities outstanding. Metris itself was downgraded to triple-C-plus from B in February, while in mid-March S&P placed various Metris deals on credit watch with a negative outlook. The amount of bad debt and delayed payments by credit-card holders represented in Metris's asset-backed securities continued to deteriorate in February, to 22.6% and 18.4% of total loans, respectively, from 20.4% and 17.8% in January.
A Metris spokesman says the company expects losses to have peaked in the first quarter. In April, bad debts were slightly higher than January's level at 20.6%, with delayed payments at the same level as in January. But the spokesman notes that delayed payments of under 30 days were beginning to come down, suggesting a further drop in coming months.
So far, Metris's asset-backed securities are continuing to make payments to investors as promised, though the prices of the securities have been hammered.
While Metris hasn't issued any new bonds in over a year, partly because of the sour investor sentiment, some other struggling consumer lenders have tapped the market, using some sort of credit enhancement or insurance. Even with that protection, AmeriCredit Corp., which loans money to car buyers with risky credit histories, has had to offer investors significantly more return to whet their appetite than a year ago, according to Mary Kane, an analyst with Citigroup Inc.'s global and corporate investment bank.
The market also has been hit by minor shocks as some one-time active issuers have filed for bankruptcy-court protection. These include Conseco Inc., a big mobile-home lender, which filed in mid-December, and Spiegel Inc., which filed on March 17. Spiegel's First Consumers Bank unit finances consumers buying either from Spiegel Catalog or its Eddie Bauer retail unit.
Asset-backed-securities investors aren't supposed to be affected if an issuer files for bankruptcy-court protection, as the bonds are structured so they continue to pay. But in both the Conseco and Spiegel instances, judges and regulators altered the terms of agreements with investors, by giving higher fees and higher priority to the companies that took over the back-office service function.
And in recent weeks securities backed by the promise of tobacco companies to pay states huge settlements in cigarette-related litigation have taken hits as investors fretted that the tobacco companies may not generate the cash flow to pay for those settlements.
Even the deals backed by Mr. Bowie's music have lost some glitter: Moody's recently put the so-called Bowie bonds, sold in 1997, on review for possible downgrade.
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