EUROPACE ABS Monitor

22 November 2007 

New MBS transactions

Retained dealflow continues to characterise the European ABS market, with a steady pipeline of transactions announced, but tranches usually kept by the issuer, primarily for repo operations with central banks or for regulatory capital reasons.

This has been the case with recent Spanish transactions. BBVA RMBS 4 was a very large Euro4.9bn Spanish RMBS, but was retained by BBVA. Spanish banks have also been securitising SME loans, including the Euro1.03bn Foncaixa FTGENCAT 5 transaction which was launched but retained by La Caixa. 

However Lehman Brothers did recently publicly market the Triple A tranche of its Eurosail UK 2007 SNP deal, backed by non-conforming mortgages from a variety of originators, including Matlock and the London Mortgage Company. The Pounds626m worth of 2.6 year Triple As were priced at a 70bp spread. The Triple B tranche was indicated at 375bp, but may have been retained.

Lehman has also recently begun marketing a CMBS offering, the Euro1.1bn pan-European Windermere XIV. The 3.9 year Triple A tranche was initially suggested in the high 60s.

And Morgan Stanley has announced ELOC 29, the latest deal from its CMBS conduit, backed by a single loan with 65 properties located in continental Europe the collateral pool.

The prospect of financial services staff layoffs in London has sparked fresh concerns about the office rental market, which is making investors wary of CMBS deals backed by London office properties. Reports suggest that banks are taking short leases on space while they decide on headcount reductions, and falling sale and rental prices on London office space are widely anticipated for 2008.

Drop of the UK house prices

In the residential market, the biggest property developer in the UK, Barratt Developments has reported a 17 per cent drop in house sales in the second half of the year compared to 2006, and there is plenty of other evidence that potential house buyers are staying out of the market because of uncertainty about its direction.

The buy-to-let market in the UK is of particular concern, and is being hit from both directions, with buyers scared off by the possibility of falling property prices, while mortgage lenders are scaling back lending and increasing interest rates because of their own funding difficulties.

Spreads across the RMBS sector

In thin secondary market trading, Triple A prime RMBS tranches from Germany and the Netherlands have been trading at around 40bp, with UK issues wider at 45bp, reflecting the growing unease about the UK market. But UK buy to let deals are trading much wider, at around 70bp.

Early in 2007 the weight of money had compressed spreads across the RMBS sector, and investors were willing to accept a very small premium for non-prime product. In May, prime UK RMBS were typically trading at a 10bp spread in the secondary market, with buy-to-let only 3bp wider at 13bp, and non-conforming deals at 17bp.

The UK buy-to-lender: Paragon Group

One of the major UK buy-to-let lenders, the Paragon Group of companies, released strong full year results this week, with the loan book performing well, but the auditors had to qualify the accounts, because of worries about Paragon’s continued ability to access funding.

Paragon has previously relied heavily upon securitisation for its funding. And it has been trying to renegotiate warehouse lines of credit which expire in February, but is facing difficulties in an environment where UK banks are hoarding cash, and are jittery about extending credit to mortgage originators.

On Tuesday Paragon shares fell by 50 per cent and trading was suspended for the day. Paragon has started work on a possible rights offering to raise extra equity capital, led by UBS, while at the same time pursuing its preferred option of putting new bank facilities in place.

Successful portfolio sale by Bradford & Bingley

On a more positive note, this week UK building society Bradford & Bingley successfully auctioned off Pounds4.2bn worth of commercial and residential mortgages.

GE Real Estate bought Pounds2bn worth of the commercial property loan portfolio, while another Pounds2bn worth of Housing Association loans were acquired by Dexia. B&B will book a small loss on the portfolio sale, but now has a liquidity cushion which will last for many months, giving time for the securitisation markets to recover. The most recent RMBS deal from the B&B Aire Valley master trust was in May.  

News across different asset classes

The whole loan sales are also viewed as positive since they show that there are financial buyers willing to come into the market with multi-billion Pound acquisitions, instead of waiting around for further falls in the market for mortgage loans.

In the credit card sector, Citigroup has announced that it is buying back certain delinquent accounts from the Pillar master trust, which is backed by credit card receivables originated by Egg, which Citigroup acquired last year.

But the Financial Services Authority in the UK has ruled that this move provides implicit support for the Pillar master trust by Citigroup, and that therefore Citigroup will no longer receive regulatory capital relief for the securitisations, as would normally apply in true sale deals.

The mismanagement of bad news

Meanwhile, in the United States market, a Goldman Sachs analyst has forecast that Citigroup will have to come back with additional write downs on its sub-prime mortgage exposure during the first quarter of 2008. The fact that the big banks across Europe and the United States did not deal with the problem with aggressive write-downs, but keep coming back with more bad news, has unsettled investors.

The mismanagement of bad news had added to the sense of crisis, with analysts saying that accounts should have been ‘kitchen-sinked’ in the third quarter.

But the subprime problem was not fully addressed. Instead bank lenders and equity market investors are still worried about where bad news will come from, and interbank lending rates in the UK have risen again this week, while share prices in banks and building societies have fallen.

Traditionally late November and early December has been the busiest time of the year for the European securitisation market, with a rush of year end deals. But attention is now focussed more on preparing transactions for January, as many issuers have given up on prospects for getting deals away in the few remaining weeks. 

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