NEW YORK, Jan 7 (IFR) - The Dutch State Treasury Agency's
second auction of legacy US RMBS will likely comprise
better-performing bonds and be more weighted towards fixed-rate
mortgage bonds as collateral.
It announced on Monday that it would sell off at least
USD2.5bn more of the US RMBS portfolio the government acquired
as part of the financial crisis bailout of Dutch bank ING.
"The DSTA is likely targeting higher-quality bonds in the
upcoming second auction and in fact may be trying to attract
more institutional investors, including insurance companies,
this time around," John Sim, head of non-agency mortgage bond
strategy at JP Morgan, told IFR.
"I would think that what's left over in the ING portfolio
mainly comprises prime ARM and Alt-A fixed-rate RMBS, with bond
prices potentially in the USD80 to USD90 range."
In December it auctioned off USD5.1bn of its legacy ING
portfolio - mostly pay-option ARM collateral - leaving mainly
fixed-rate Alt-A and prime residential mortgage bonds remaining.
That auction was the largest sale of legacy US mortgage risk
to the secondary market from a large European bank since Lloyds
sold a US$8.7bn list in May 2013.
Five broker-dealers were invited to the December auction
conducted by BlackRock, which is also running the upcoming sale.
Bank of America Merrill Lynch won a majority share of
USD1.849bn, followed by Goldman Sachs (USD1.269bn), Morgan
Stanley (USD788m), Credit Suisse (US$659m) and Deutsche Bank
The banks quickly sold about two-thirds of the bonds on to
investors, who have been clamoring for legacy US RMBS debt as
valuations increase amid a recovery in US home prices.
Demand for the second DSTA auction is expected to be just as
strong, based on the double-digit returns up for grabs.
In 2013, legacy subprime paper returned nearly 30%, and
dented Alt-A and option ARM paper returned around 20%, according
to JP Morgan analysts.
The last auction was heavily weighted towards pay option ARM
RMBS paper, which accounts for nearly half of the overall ING
portfolio based on current face balance, according to
"The remaining portfolio experienced a meaningful shift
toward fixed-rate collateral, with more than 50% now in this
subsector, up from only 37% previously," wrote David Varano, an
analyst at the financial-data firm, in a new report.
"Regarding underlying loan credit quality, the DSTA
portfolio appears to have been left with better-performing
securities in the wake of the first bid list sale."
According to JP Morgan's Sim, 92% of the December auction
comprised riskier pay-option ARM collateral. But the higher
quality paper left over may still have an audience.
"Traditional asset managers want higher quality paper, so
the second auction may attract insurance company money that
seeks the equivalent of NAIC-1 or NAIC-2 rated paper," Sim said.
"The current risk-reward scenario may favor higher-quality
paper because investors are not getting paid enough to take on
the increased risks of lower-tier paper."
The DSTA expects to be able to divest the remaining assets
within a period of 12 months.
On a weighted-average basis, the bonds sold last month had
an evaluated price of roughly USD60, compared with a higher
average of USD84 for the remaining portfolio.
The higher price likely reflects that the bonds were
originally higher in the capital structure, with adequate credit
enhancement and strong structural support.
About 32% of the remaining portfolio comprises Alt-A
fixed-rate paper, while 30% is prime adjustable-rate.
Only 2% now comprises pay-option ARM paper, which accounted
for 43% before the previous sale, Interactive Data said.
The last bid list reportedly traded very well, with
investors taking down roughly 65% of the bonds, according to
FINRA's publicly available Trade Reporting and Compliance Engine
The other 35% stayed with dealers, which are still trying to
sell it down.
(Reporting by Adam Tempkin; Editing by Marc Carnegie)
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