EUROPACE ABS Monitor

06 December 2007 

More bid lists but limited interest

A small number of ABS deals have been launched over the past few weeks, but most tranches continue to be retained by issuers, mainly for use as collateral for central bank liquidity facilities.

In the secondary market, more bid lists have been circulating, but have found very limited interest from buyers.  Analysts point to good value at current wide spreads, but the majority of investors are still staying away from the market, conserving year-end liquidity.

Issuers hope that this wait-and-see stance will change once the New Year arrives, with investors deciding on their strategies for 2008, which should at least include buying some prime Triple A rated RMBS and CMBS paper, as well as auto and credit card ABS.

New deals mostly retained

The biggest deal in recent weeks was the partially funded synthetic Collateralised Loan Obligation from Lloyds TSB, under the name Goodwood Gold. The funded portion only amounted to Pounds292m of the Pounds3bn deal, but given the tight spreads that were announced analysts believe it was unlikely that the notes were sold.

Similarly, the Greek consumer loan transaction, Daneion 2007-1, was structured to be retained as European Central Bank eligible collateral.

Meanwhile, Fortis has structured a remarkable Euro11.2bn worth of RMBS from its Dolphin Master Trust since September, including the latest Euro3bn transaction. But all these tranches have also been retained.

Similarly, Mesdag (Echo) was a pan-European (75% German, 25% Dutch) residential multi family CMBS from NIBC, with all tranches retained.

However Standard & Poor’s has recently published a presale report on the Private Driver 2007 transaction, a Euro250m auto loan receivables deal from Volkswagen, which could find its way to end investors. And Deutsche Bank has been doing some marketing for its latest pan-European CMBS deal, Deco 17, which is a Euro1.25bn offering. But Morgan Stanley, which was marketing ELoC 29, has postponed this deal until January.

Where are the tightest spreads?

In secondary trading, during November UK prime Triple A RMBS widened out by around 20bp, and are currently trading around the 65bp level, with UK Buy to Let much wider at 100bp, and non conforming RMBS tranches at 125bp.

Spanish Triple A RMBS have been trading at 85bp, while the tightest spreads in the European market are seen on Dutch prime Triple A tranches, at around 55bp in thin trading. Triple B tranches are even more illiquid, but again indicative pricing for prime Dutch tranches is the tightest, at around the 200bp level, rising to 300bp for UK tranches and 400bp for Spanish issues.

The relative attractiveness of Dutch versus UK paper, which between them were the benchmark products for the RMBS market until the middle of 2007, reflects growing concerns about the UK housing market, where prices have run up much faster than in The Netherlands.

Forecasts from some analysts of a 10% drop in UK house prices in 2008 are worrying holders of UK RMBS tranches. New mortgage loan approvals are running one third below levels see a year ago, and house prices have begun to fall very slightly. But many analysts believe that sellers are going to have to significantly reduce their asking prices to get sales completed.

Problematic situation in the non conforming sector

In the non conforming sector the situation is problematic, since the disappearance of wholesale funding has left many lenders cut off from fresh capital, and they are being forced to reduce their mortgage lending volume, as well as increasing margins. This lack of availability of cheap mortgages will probably reduce the amount of UK buy to let investors, who in any case are suffering from low rental yields, and have been relying upon capital appreciation for their returns.

Earlier this week the Financial Services Authority in the UK warned mortgage lenders to assume that wholesale funding conditions were going to remain very difficult for some time, and added that the end to fixed rate introductory deals on mortgages during 2008 would place a big strain on borrowers, and could lead to a big rise in delinquencies.

Biggest quarterly drop in US house prices in twenty years

In the United States, the biggest quarterly drop in house prices in twenty years has been recorded. Treasury Secretary Hank Paulson is trying to get mortgage lenders to freeze interest rates for sub-prime borrowers whose loans re-set in 2008. By keeping lower rates in place, in spite of an increase in wholesale funding costs, Paulson hopes to avid the much worse scenario of a wave of defaults on mortgage payments by hard pressed US households.

HSBC restructures two of its SIVs

There was some good news for the ABS market in late November, when HSBC announced moves to restructure two of its Structured Investment Vehicles, Cullinan Finance and Asscher Finance. 

The two will now be 100% liquidity supported by HSBC. The two SIVs hold around $50bn worth of assets in total, and since they now operate without market value tests and Net Asset Value triggers there is much less pressure to sell assets, including large volumes of ABS tranches.

This was seen as a much needed boost for confidence in the ABS market, and has raised hopes that  other banks may follow the HSBC example. And in the United States, the M-LEC super SIV supported by Citigroup, JP Morgan and Bank of America is still being put together.

Hedge funds sponsors such as Cheyne and Axon Financial did not have the financial resources to support deals, and are in enforcement mode, though Cheyne has avoided rapid fire sale of assets via a bankruptcy administration process handled by Deloitte.

But if more big bank sponsored SIVs can follow the lead taken by HSBC then the huge overhang of ABS tranches will no longer scare away investors, and will give them more confidence to return to the market as buyers. The flip side is that banks themselves may not be able to return to the ABS markets as significant buyers, while they are assessing the effects of having to directly fund these ABS portfolios.

The problem for the banks is that they are putting huge volumes of assets back on their balance sheets at a time when their own funding costs are rising. A good example was the recent $4bn offering of ten year senior unsecured bonds by Citigroup in the United States domestic market, which saw Citi having to pay investors a spread of US Treasuries plus 190bp.

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