Tuesday, February 8, 2011

Non-RMBS Outlook is Structured Credit's God Ray

The landscape of structured credit has been darkened by the clouds of shoddily underwritten residential mortgages for over three years. It has now been years since prognosticators started calling for a second-coming of doom in the form of a leveraged loan, CMBS, and plain-old corporate debt maturity wall in 2012-14.

The New York Times reported that wall was higher than $700B as recently as last March. But since 2009 the slug of all debt due before 2014 has been reduced by 44% to $482B, according to a report from Bloomberg today. This suggests that an authentic (non-legal) credit improvement may benefit losses booked by at least two bond insurers. That is in stark contrast to RMBS credit where any positive loss developments have been due principally to subrogation and other legal means of recovery.

Other than continued economic recovery, much of the improvement can be accredited to investors' appetite for yield in a low yield environment. At this week's American Securitization Forum in Orlando, a CMBS executive for S&P comically expressed his surprise at the "crap" getting done in the market this early in the cycle. One company that may benefit from a surprisingly strong recovery in CMBS fundamentals and refinancing is MBIA, which has booked hundreds of millions in CMBS losses mainly attributable to one deal.

Hastened run off could benefit the capital position of all guarantors by accelerating premium earnings. Assured Guaranty stands out as a possible beneficiary because of its large CLO exposure and the potential incentive to improve its leverage ratios pending S&P's proposed ratings criteria for bond insurers. The Blue Dragon believes the Assured's CLO exposure also makes up the lion's share of RAM Reinsurance's structured finance exposure.

If one gives a nod to the yield curve, the coming economic environment may prove the CMBS crap getting done right now will work out, at least for a while. That's because a steep yield curve has been one of the best predictors of future economic growth.

Today's yield curve is also Ben Bernanke's Chicken Soup for the Banking Soul, since bank's borrow short and lend long. The healthy curve could benefit a Trust Preferred deal for which Radian Asset Assurance has booked tens of millions in loss reserves, over and above the recent positive economic developments. It could also strengthen the credits in Radian's large book of TruPS CDOs.

While these developments shed a positive ray of light on the structured finance landscape, the horizon is still dominated by residential mortgages and related lawsuits for the guarantors.

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