Subprime `Tsunami' Hits Asset-Backed Commercial Paper Market

Discussion in 'Wall St. News' started by THE-BEAKER, Aug 9, 2007.

  1. Aug. 8 (Bloomberg) -- Companies are extending payments on commercial paper backed by home loans for the first time as the subprime mortgage crisis spreads to debt perceived to be among the safest in the market, according to Moody's Investors Service.

    Units of American Home Mortgage Investment Corp., the residential-mortgage lender that filed for bankruptcy, Luminent Mortgage Capital Inc., facing margin calls from lenders, and Aladdin Capital Management LLC, this week exercised an option allowing them to delay repaying the debt, Moody's said.

    The three issuers are probably the only ones to defer payments since extendible asset-backed commercial paper was first sold 12 years ago, according to New York-based Moody's. The failure of some companies to pay on time has cast a pall over the securities, which are considered to be almost risk free, said Lee Epstein, chief executive officer of Money Market One.

    ``The subprime tsunami has come to the beach, as it were, to the safest of the safe,'' Epstein said. Money Market One is a San Francisco-based broker-dealer of short-term securities.

    Commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities and hold money for everything from individual savings to the coffers of Standard & Poor's 500 companies. The cash from money market accounts is lent to entities such as those owned by American Home and Luminent to buy mortgages, bonds, credit card and trade receivables as well as car loans. Extendible notes allow the issuer to delay repayment for as long as 397 days, the maximum U.S. money market funds may hold.

    Higher Rates

    Asset-backed commercial paper comprises about half, or $1.15 trillion, of the $2.16 trillion in commercial paper outstanding, with extendible notes making up about 15 percent of the asset- backed portion, or about $172.5 billion, according to Moody's.

    Investors are demanding higher interest rates on so-called asset-backed commercial paper, extendible or not, than on commercial paper issued by companies like General Electric Co. and Citigroup Inc. to fund their operations, because of concern about the value of the collateral.

    Extendible asset-backed commercial paper yesterday carried yields of 5.75 percent to 5.95 percent, compared with 5.45 percent for asset-backed commercial paper that isn't extendible and 5.25 percent to 5.30 percent for corporate commercial paper, Epstein said.

    ``Commercial paper buyers are notoriously risk averse because they have such thin margins,'' said Simon Adamson, a London-based bank analyst at CreditSights Inc., an independent debt research firm.

    Debt markets rebounded today after the Federal Reserve eased concerns that a slump in credit markets would derail the economy. The perceived risk of owning corporate debt fell to the lowest in more than a week, based on credit-default swaps, and at least 13 companies lined up debt sales.

    Luminent, Aladdin

    Luminent Star Funding, sponsored by San Francisco-based Luminent, is a securities program that invested in AAA rated mortgages. Luminent this week extended its commercial paper maturities and canceled its dividend payments after bankers issued margin calls. The company today said two lenders sent default notices.

    Luminent Chief Financial Officer Christopher J. Zyda didn't calls seeking comment.

    Ottimo Funding Ltd., a securities program run by Stamford, Connecticut-based Aladdin, also invested in the highest rated assets. George Marshman, a co-founder and chief investment officer of Aladdin, declined to comment.

    American Home Mortgage's Broadhollow Funding LLC extended maturities on commercial paper after being unable to roll over $150 million of the debt, Moody's said. The program can be extended by 120 days, Moody's said.


    Melville, New York-based American Home's secured liquidity note program may be cut by Moody's from its top rating of Prime- 1. Broadhollow had $138 million of subordinated notes cut to Ba1, the highest speculative grade, from Baa2. The notes remain on watch for further downgrade. The change followed American Home's filing for bankruptcy on Aug. 6.

    American Home spokeswoman Mary M. Feder didn't return a call seeking comment.

    ``To my knowledge, there have been no extension events'' until this week, said Everett Rutan, a senior vice president at Moody's Investors Service. ``What's happened recently has been extraordinary.''