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Collateralized Subprime, again?
Old 02-06-2013, 05:08 AM   #1
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Collateralized Subprime, again?

Didn't this end badly the last time?

AIG, Fortress Unit Test ABS With Personal-Loan Securitization | Fox Business

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The consumer-lending joint venture of private-equity firm Fortress Investment Group LLC (FIG) and insurer American International Group Inc. (AIG) is planning a rare securitization of subprime personal loans as early as this week, in the latest test of risk appetite for asset-backed bonds, where soaring demand has pushed yields to record lows.

./.

The 190,627 loans in the Springleaf deal have an average FICO credit score of 602, in line with many subprime auto ABS. But the average coupon of 25% on Springleaf's personal loans is above that on even "deep subprime" auto loans, probably because there is no collateral for 10% of the issue, an analyst said.

The "A" rated slice of the debt may yield near 2.5%, or 2 percentage points over an interest-rate benchmark, according to price talk circulated to investors. Similarly-rated but slightly longer-term debt within Santander's issue sold at a 1.775% yield.
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Old 02-06-2013, 07:32 AM   #2
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This is the same paper Lending Club deals in. What could be better?
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Old 02-06-2013, 08:16 AM   #3
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Asset backed securities can be good or bad, there is nothing inherently wrong with them...

I was a manager of many in the late 90s... they paid all thier payments on time, even the lowest rated traunch...


It makes a difference in what assets are included and if the people managing them are doing it correctly...


As an example, I had one that was a revolving bond... it would buy sub prime auto loans on a regular basis... whenever payments of principal were received it allowed the trust to buy more loans... The thing that make it profitable was that the person buying the car had to put down a good amount, which the trust held. If they did not make their payment, the car was repoed within two days (most of the time) and then resold... I saw cars being sold over and over again...

This trust was also overfunded. IOW, there were a good percent more assets backing the bonds than bond balance outstanding...
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Old 02-06-2013, 09:17 AM   #4
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"the latest test of risk appetite for asset-backed bonds, where soaring demand has pushed yields to record lows."

Everybody is desperate for yield. My guess is that the pile-on momentum will create some rotten apples and then the herd will stampede at some point. What is the security, a parking-lot's worth of f-150 pickups?
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Old 02-06-2013, 09:31 AM   #5
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" $662 million of loans secured by assets such as cars, boats, furniture and jewelry into ABS"

Ohhh, I want some of the furniture and jewelry loans! I bet the pissed-on counches and cubic zirconia bling will give high recovery rates after they are repo's.
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Old 02-06-2013, 10:22 AM   #6
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With $662M across 190627 loans, the average loan value is $3472. What is the collection cost? I'd guess investor recoverable assets would be <25%.
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Old 02-06-2013, 10:24 AM   #7
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With $662M across 190627 loans, the average loan value is $3472. What is the collection cost? I'd guess investor recoverable assets would be <25%.
Rule of thumb on "decent" subprime auto loans is that you might recover 50% upon repo and liquidation of the collateral. I would expect these loans to be way south of that, almost certainly sub 25%.
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Old 02-06-2013, 10:33 AM   #8
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Jeeeez. Maybe they'll all get the ratings they deserve this time, small consolation? Lots of blame to go around, but I've wondered how the major ratings agencies ever survived with any credibility after the 2009 meltdown...
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Old 02-06-2013, 11:03 AM   #9
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Jeeeez. Maybe they'll all get the ratings they deserve this time, small consolation? Lots of blame to go around, but I've wondered how the major ratings agencies ever survived with any credibility after the 2009 meltdown...
To be fair, securitizations can be just fine as bonds depending on what the collateral is and how they are structured. Where things appear to have gone wrong in the past is tha quality of the underlying loans got much worse than people thought and the securitization structures got increasingly aggressive/leveraged. The loans in this pool are of quality. However, with a 25% interest rate on the loans there is a lot of interest to absorb losses. As long as the securitization structure were conservatively structured, the senior bonds should be fine.
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Old 02-06-2013, 03:12 PM   #10
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Didn't this end badly the last time?
Yep, and so did this.

FHA gives those who defaulted on homes another chance

"The FHA is a major source of cash for so-called rebound buyers, but the bankrolling of borrowers who contributed to the last housing bubble is raising concerns"
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