A sizeable $8.7 billion nongency bid list for a structured-finance deal submitted by Lloyds Banking Group to various securities dealers is due out May 28, with the company looking to benefit from a recent rally in private-label residential mortgage-backed securities valuations, analysts claim.
The deal is composed mostly of adjustable-rate collateral, with the highest concentration in Alt-A paper. The bidding will be conducted on an all-or-nothing basis, Interactive Data noted in its latest release.
“This comes after a relatively muted pricing impact from last week’s large scale, well publicized deleveraging event in the private-label mortgage market [by Freddie Mac,] which has traders reassessing investor risk appetite for legacy assets,” explained analysts for Interactive Data.
The Street has not expressed major concern over the market’s ability to absorb such elevated amounts of supply so far. However, potential signs of caution have been observed ahead of the holiday weekend.
Investor positions have risen steadily since last week’s $1 billion securitization deal by Freddie Mac, both for investment grade and non-investment grade.
Incidentally, Interactive Data has observed a general downward trend among select broker-dealer investor offering levels over the same time period.
“While the 5/28 list has similar collateral compared with the 5/15 list, the overall bond quality appears to be worse based on evaluated prices,” the report said.
Meanwhile, the larger than usual secondary market supply appears to be impacting the overall appetite for risk, with generally more conservative expectations from the dealer community.
For instance, average Px Talk levels — the discussion of the appropriate price for an upcoming security — fall short of evaluated levels by a far larger margin for the multi-billion dollar bid list, particularly in investment grade bonds, Interactive Data said.
Furthermore, bonds with higher evaluation levels, and in particular, those approaching par, exhibited the largest discrepancy between forward-looking market indications and current evaluated prices.
“Given the higher credit sensitivity for weaker performing bonds, there is likely more potential upside for these bonds should the housing recovery continue to improve,” Interactive Data analysts explained.
They concluded, “A similar trend in which stronger performance for more credit sensitive bonds was also witnessed last month in the primary markets, where super seniors widened, while more subordinated classes tightened.”