BlackRock readies second big RMBS sale

Fri Jul 18, 2014 12:59pm EDT

* Once-toxic assets fetching high 70 dollar prices

* Auction set for Tuesday with two large lots

* Timing may be linked to repo-style loan

By Joy Wiltermuth

NEW YORK, July 18 (IFR) - BlackRock will launch another sale of once-toxic residential mortgage-backed bonds next week, seizing on a dramatic shift in demand for such assets and a rebound in prices since the crisis.

The sale, for US$4.4bn, is tipped for Tuesday at 10am New York time, market sources said, and will have a different execution style to this week's auction.

Tuesday's US$3.7bn all-or-nothing trade - the biggest of its kind since the crisis, which only considered bids for the entire list was won by Credit Suisse.

BlackRock will split the sale of the next block into two distinct all-or-nothing groups.

Scott Buchta, head of fixed-income strategy at Brean Capital, said BlackRock was taking advantage of a shortgage in new RMBS supply and pent-up demand from investors chasing yield.

"Prices have recovered enough to make the sale more economical from the sellers point of view," Buchta said.

"The first list went well enough that it encouraged BlackRock to bring the second. They'll strike while the iron is hot."

BACK IN FAVOR

The legacy bonds are backed by UBS collateral that was hived off the Swiss bank's balance sheet after the mortgage crash.

Such formerly toxic assets - the kind that brought down the likes of Bear Stearns and Lehman Brothers - are now regaining favor in the eyes of investors.

TRACE data indicate Credit Suisse has already placed a majority of the bonds it bought in the first auction.

And prices on such assets have rebounded dramatically.

According to JP Morgan data, the average price of subprime ABS deals had sunk to between 15 and 20 cents on the dollar in April 2009. That figure is now 70 cents.

Credit Suisse paid even more than that, as the bonds fetched a second-best bid 73.16 cents from Goldman Sachs, one of the sources said. Price talk had gone out around 67 cents.

Next week's batch will likely attract a broader base of buyers than the first, as it includes floating-rate, fixed-rate and adjustable-rate securities, including Option-ARMs - adjustable-rate mortgage bonds - according to Adam Murphy, president of trade database company Empirasign Strategies.

The first lot comprised of a mixed-bag of prime, subprime, home equity and Alt-A bonds, he said.

Alt-A is shorthand for alternative mortgage bond paper considered riskier than A grade collateral that qualified as prime prior to the credit crisis.

DUE LOAN?

UBS was forced to write down more than CHF50bn in the aftermath of the subprime mortgage meltdown, according to an October 2010 report from the bank, hiving soured assets off its balance sheet into bad banks.

One of the sources, a former executive at the Swiss bank involved in the overhaul, said the timing of the BlackRock auctions may also be related to the maturity of a senior loan that financed a sale of some of those assets to BlackRock.

UBS also kept an equity stake in the soured securities portfolio, the source said. Another source likened the arrangement to a long-term repo, which could trigger cash-flows from the portfolio to UBS at maturity.

To avoid that, BlackRock would need to repay the loan before it matures, and one of the ways to do that is by selling some of these assets at prices not available for years.

The exact terms of such loans, of which several were made to different parties for UBS's soured assets, are unclear.

"There were a lot of these creepy, sneaky structures at UBS during this time," another source said.

Calls to BlackRock and UBS were not returned. Credit Suisse and Goldman Sachs declined to comment. (Reporting by Joy Wiltermuth; Editing by Natalie Harrison and Marc Carngie)