Subprime `Tsunami' Hits Asset-Backed Commercial Paper Market

This was foreseeable....

By Mark Pittman and Elizabeth Stanton Aug. 8 (Bloomberg) -- Companies are extending payments on commercial paper backed by home loans for the first time as thesubprime mortgage crisis spreads to debt perceived to be amongthe safest in the market, according to Moody's Investors Service. Units of American Home Mortgage Investment Corp., theresidential-mortgage lender that filed for bankruptcy, Luminent Mortgage Capital Inc., facing margin calls from lenders, and Aladdin Capital Management LLC, this week exercised an optionallowing them to delay repaying the debt, Moody's said.
The three issuers are probably the only ones to deferpayments since extendible asset-backed commercial paper was firstsold 12 years ago, according to New York-based Moody's. Thefailure of some companies to pay on time has cast a pall over thesecurities, which are considered to be almost risk free, said LeeEpstein, chief executive officer of Money Market One.
``The subprime tsunami has come to the beach, as it were, tothe 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 islent to entities such as those owned by American Home and Luminent to buy mortgages, bonds, credit card and tradereceivables as well as car loans. Extendible notes allow theissuer to delay repayment for as long as 397 days, the maximumU.S. money market funds may hold.
Higher Rates
Asset-backed commercial paper comprises about half, or $1.15trillion, 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-calledasset-backed commercial paper, extendible or not, than oncommercial paper issued by companies like General Electric Co.and Citigroup Inc. to fund their operations, because of concernabout the value of the collateral. Extendible asset-backed commercial paper yesterday carriedyields of 5.75 percent to 5.95 percent, compared with 5.45percent for asset-backed commercial paper that isn't extendibleand 5.25 percent to 5.30 percent for corporate commercial paper,Epstein said.
``Commercial paper buyers are notoriously risk aversebecause they have such thin margins,'' said Simon Adamson, aLondon-based bank analyst at CreditSights Inc., an independentdebt research firm. Debt markets rebounded today after the Federal Reserve easedconcerns that a slump in credit markets would derail the economy.The perceived risk of owning corporate debt fell to the lowest inmore than a week, based on credit-default swaps, and at least 13companies lined up debt sales.
Luminent, Aladdin
Luminent Star Funding, sponsored by San Francisco-basedLuminent, is a securities program that invested in AAA ratedmortgages. Luminent this week extended its commercial papermaturities and canceled its dividend payments after bankersissued 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 ratedassets. George Marshman, a co-founder and chief investment officer of Aladdin, declined to comment. American Home Mortgage's Broadhollow Funding LLC extendedmaturities on commercial paper after being unable to roll over$150 million of the debt, Moody's said. The program can beextended by 120 days, Moody's said.
`Extraordinary'
Melville, New York-based American Home's secured liquiditynote 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 onwatch for further downgrade. The change followed American Home'sfiling 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 atMoody's Investors Service. ``What's happened recently has been extraordinary.''--With reporting by Joseph DiStefano in New York. Editor: MoodyTo contact the reporter on this story:Mark Pittman in New York at +1-212-617-3767 ormpittman@bloomberg.net;Elizabeth Stanton in New York at 1-212-617-5937 orestanton@bloomberg.netTo contact the editor responsible for this story:Emma Moody at +1-212-617-3504 or emoody@bloomberg.net.