by Adam Tempkin
NEW YORK, June 29 (IFR) - Countrywide subprime and Alt-A mortgage bonds from 2006 and 2007 - known as the CWL, CWHL, and CWALT series - will likely garner the largest amount of proceeds throughout their entire capital structure from the Bank of America MBS settlement, according to Paul Jablansky, RMBS strategist at Royal Bank of Scotland.
The outstanding collateral balance on those series of RMBS bonds is approximately $175 billion. That means the $8.5 billion settlement is about 4.9% of the total, which would effectively look like a single-month prepayment rate to investors of a whopping 45%.
"For current paying bonds trading at a discount, this is obviously a small windfall," Jablansky said.
Losses to an RMBS deal typically hit the junior-bond holders first, working their way up the capital structure. Proceeds from the settlement will be distributed in the opposite order - i.e., according to seniority - meaning that holders of the senior-rated bonds from a legacy RMBS offering will receive settlement payments first.
Since the cash is expected to go to holders of the senior bonds first - which likely took fewer losses than the more subordinated paper - senior subprime RMBS paper may quickly become more coveted in the secondary market.
One investment banker on a non-agency MBS desk said that investors were specifically looking to buy the senior RMBS bonds today.
Moreover, some bid lists up for trade today contained so-called "call options on clawbacks," meaning that buyers of these bonds will have the option to receive a portion of the settlement that goes through the cashflow waterfall on the legacy Countrywide bonds.
"Sellers could be looking to recognize some money for this optionality," said Adam Murphy, president of Empirasign Strategies LLC, a capital markets data provider.
Meanwhile, slices of legacy deals that were originally lower-rated - so-called mezzanine and subordinate bonds - will be "written up" again by proceeds from the BofA settlement if they were previously written down or liquidated, Jablansky said.
"The net effect is to provide reimbursement for some portion of prior losses and accelerate recoveries on future losses," he added.
(Adam Tempkin is a senior IFR analyst)