By Adam Tempkin
NEW YORK, Jan 7 (IFR) - The Dutch State Treasury Agency'ssecond auction of legacy US RMBS will likely comprisebetter-performing bonds and be more weighted towards fixed-ratemortgage bonds as collateral.
It announced on Monday that it would sell off at leastUSD2.5bn more of the US RMBS portfolio the government acquiredas part of the financial crisis bailout of Dutch bank ING.
"The DSTA is likely targeting higher-quality bonds in theupcoming second auction and in fact may be trying to attractmore institutional investors, including insurance companies,this time around," John Sim, head of non-agency mortgage bondstrategy at JP Morgan, told IFR.
"I would think that what's left over in the ING portfoliomainly comprises prime ARM and Alt-A fixed-rate RMBS, with bondprices potentially in the USD80 to USD90 range."
In December it auctioned off USD5.1bn of its legacy INGportfolio - mostly pay-option ARM collateral - leaving mainlyfixed-rate Alt-A and prime residential mortgage bonds remaining.
That auction was the largest sale of legacy US mortgage riskto 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 auctionconducted by BlackRock, which is also running the upcoming sale.
Bank of America Merrill Lynch won a majority share ofUSD1.849bn, followed by Goldman Sachs (USD1.269bn), MorganStanley (USD788m), Credit Suisse (US$659m) and Deutsche Bank(USD553m).
The banks quickly sold about two-thirds of the bonds on toinvestors, who have been clamoring for legacy US RMBS debt asvaluations increase amid a recovery in US home prices.
Demand for the second DSTA auction is expected to be just asstrong, based on the double-digit returns up for grabs.
In 2013, legacy subprime paper returned nearly 30%, anddented Alt-A and option ARM paper returned around 20%, accordingto JP Morgan analysts.
TRADING WELL
The last auction was heavily weighted towards pay option ARMRMBS paper, which accounts for nearly half of the overall INGportfolio based on current face balance, according toInteractive Data.
"The remaining portfolio experienced a meaningful shifttoward fixed-rate collateral, with more than 50% now in thissubsector, up from only 37% previously," wrote David Varano, ananalyst at the financial-data firm, in a new report.
"Regarding underlying loan credit quality, the DSTAportfolio appears to have been left with better-performingsecurities in the wake of the first bid list sale."
According to JP Morgan's Sim, 92% of the December auctioncomprised riskier pay-option ARM collateral. But the higherquality paper left over may still have an audience.
"Traditional asset managers want higher quality paper, sothe second auction may attract insurance company money thatseeks the equivalent of NAIC-1 or NAIC-2 rated paper," Sim said.
"The current risk-reward scenario may favor higher-qualitypaper because investors are not getting paid enough to take onthe increased risks of lower-tier paper."
The DSTA expects to be able to divest the remaining assetswithin a period of 12 months.
On a weighted-average basis, the bonds sold last month hadan evaluated price of roughly USD60, compared with a higheraverage of USD84 for the remaining portfolio.
The higher price likely reflects that the bonds wereoriginally higher in the capital structure, with adequate creditenhancement and strong structural support.
About 32% of the remaining portfolio comprises Alt-Afixed-rate paper, while 30% is prime adjustable-rate.
Only 2% now comprises pay-option ARM paper, which accountedfor 43% before the previous sale, Interactive Data said.
The last bid list reportedly traded very well, withinvestors taking down roughly 65% of the bonds, according toFINRA's publicly available Trade Reporting and Compliance Enginedata.
The other 35% stayed with dealers, which are still trying tosell it down. (Reporting by Adam Tempkin; Editing by Marc Carnegie)
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