EUROPACE ABS Monitor

04 October 2007 

The situation on the primary market

The European securitisation market remains basically shut for primary offerings, with the few deals that are around being retained by the issuers, usually for use as collateral for central bank borrowing.

Analysts looking for some signs of a recovery in the ABS market are pointing to the tightening of some spreads in secondary trading, after the panic selling seen during September. But in primary the European ABS market looks set to struggle to generate much volume during October.

There have been a few tranches pre-placed with investors, but these have mainly been Dutch RMBS backed by mortgages guaranteed by state entity NHG, with investors looking to the government guarantee rather than the underlying mortgage collateral. 

Hermes XIV from SNS Bank is backed by regular mortgages, and sized at Euro2bn. It listed the five year Euro1.398bn Triple A tranche as priced at Euribor plus 38bp, which is broadly in line with current secondary market pricing for Dutch RMBS, but since all tranches were retained it does not really represent a pricing indicator for the broader market.

Green Apple from Argenta Spaarbank is a Euro1.5bn Dutch RMBS offering, once again backed by NHG guaranteed loans. The Euro750m Sound BV2 deal, also backed by NHG guaranteed mortgages originated by NIBC, did involve some pre-placement of notes, as well as some retained tranches. And a small Dutch NHG guaranteed deal from the E-MAC programme also featured pre-placement of the senior Euro250m tranche.  

Slowly towards new pricing levels

In secondary, after the September panic saw all spreads ballooning out, there is some visible tiering emerging, as the market slowly moves towards establishing new pricing levels. At the Triple A level, prime Dutch RMBS have recently tightened in 8bp to 35bp, while UK prime RMBS have tightened 5bp to 40bp. Spanish prime RMBS have tightened in 10bp to 60bp. The pick up over UK RMBS is partly a result of concerns about the quality of the performance data on some Spanish deals, as well as worries about Spanish property prices.

There has also been some RMBS issuance out of Spain, but these deals are almost all retained by the issuer, probably to be used as collateral for central bank repo operations. And the recent SME CLO deal from Bancaja similarly was retained by the bank. 

Last week there were more signs of interest from investors in the various bid lists which have been circulating, which made some secondary market spreads tighten in. However this quickly resulted in more lists appearing, showing that there are a number of big sellers who will want to offload assets in the coming months.

The problem for many asset classes is clearly one of liquidity, with investors unwilling to add more risk to their balance sheets. But in asset classes such as prime Spanish RMBS, or UK non conforming RMBS, there are also real credit concerns about the quality of the underlying collateral.

Triple A rated UK non conforming RMBS tranches have been trading at 90bp over Libor, and the Triple Bs are being marked to market at 400bp, albeit in a very thin market.

The end of the teaser-rate periods for many non conforming mortgages

Data from the UK suggests that the housing market has been holding up quite well, though the lagged effects of higher interest rates are casting a shadow over future performance.

A large number of non conforming mortgages will soon be ending their two year teaser-rate periods, and many borrowers can expect a 200bp hike in their loan rates, both because of higher Libor rates and higher margins now being demanded by the non conforming lenders.

As one mortgage servicer comments, many of these mortgages might have been expected to be churned into new refinancings by the mortgage brokers. Previously they had relied upon a fast rising market to refinance at lower LTVs, but lower quality UK property has been rising in price much slower than prime residential property in the best areas of London.

Thus, particularly for loans made at high LTVs, borrowers will soon be stuck with higher monthly payments, with no ability to refinance, and delinquencies are expected to rise in UK non conforming RMBS.

Mortgage portfolio servicers are being more pro-active in telephoning borrowers to inform them of upcoming payment increases, rather than just sending out letters. But as yet there is no clear picture emerging of how bad the deterioration in non conforming pools is going to be. Of particular concern is the large number of self certified mortgages, with allegations that mortgage brokers encouraged borrowers to overstate their income in order to qualify for a loan.

Investors holding UK non conforming tranches need to look carefully at available data on geographic location of mortgage properties, as well as detailed loan pool LTV information, rather than a simply relying upon a national average of house price appreciation and an average LTV for the portfolio.

Certainly greater tiering is expected among UK non conforming RMBS deals as the markets begin to recover in the fourth quarter.  

The slowest September since 1999

Not surprisingly, the lack of primary issuance resulted in the slowest September since 1999, and banks are struggling to generate interest in deals that they had hoped to launch in October.

Transactions listed for September included the big Pounds5bn Granite Master Trust offering from Northern Rock deal, but this was retained for use as collateral for the Bank of England bail-out. With most Spanish and Dutch deals also retained, real issuance amounts to a few privately placed RMBS tranches.

Issuers will hold off as long as possible, since they will neither want to pay very high spreads on Triple A tranches, nor risk the visible failure to place a big deal. However, some issuers will certainly want to get deals away before year end, in order to clean up their balance sheets. This raises the prospect of a rush of deals in December, which could itself put a big strain on pricing in a fragile and slowly recovering market.

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