EUROPACE ABS Monitor

7 February 2008

More deals on the watch list

Secondary market spreads in the European ABS market have widened out again over the past few weeks, as buyers continue to be scared off by bad news involving monoline insurers and more rating agency downgrades of US subprime tranches.

In a move that one analyst described as ‘breathtaking’, Standard & Poor’s has placed on creditwatch negative another 6,389 US sub-prime RMBS tranches from transactions originated in 2006 and the first half of 2007. This comprises $270bn worth of issuance, or 46.6% of the entire asset class issued over that period.

At the same time, in a partial knock on affect, S&P put another $263bn worth of Collateralised Debt Obligation tranches on rating watch negative. And Fitch Ratings has announced a new methodology which may result in the downgrade of over $220bn worth of CDOs. 

The monoline crises

These moves by the rating agencies may result in yet more mark-to-market losses in investor portfolios, particularly as Triple A tranches are downgraded. At the same time investors are grappling with the downgrades of monoline insurers, which are resulting in the loss of Triple A status for many wrapped tranches. 

Ambac and Financial Guaranty Insurance Co (FGIC) have both been downgraded. FSA has recently received an extra $500m from its parent Dexia and has been affirmed by Fitch. But Fitch has downgraded XL Capital Assurance after negotiations to raise additional capital failed to come to fruition. 

In a sign of the seriousness of the monoline crisis, the New York State Insurance Department has been attempting to co-ordinate a rescue package under which commercial banks inject capital and sustain Triple A monoline ratings, and so avoid massive mark downs in their portfolios from Triple A to Double A and below. But analysts point to plans for the M-LEC super-SIV announced last year, which was never set up, and feel that each monoline may be left to find its own solution individually.

Problem solving in the SIV sector

On a more positive note, the problems in the Structured Investment Vehicle sector continue to be addressed, with more banks agreeing to payoff Asset Backed Commercial Paper obligations as they come due. The latest initiative comes from Standard Chartered Bank, which has agreed to fund its Whistlejacket SIV, which has around $7.5bn worth of commercial paper outstanding.

As of December 2007 the Whistlejacket portfolio comprised 40% financial institutions debt, 7% monoline wrapped, 48% asset backed securities (excluding CDOs) of which 98% are rated Double A or higher, and 5% super senior tranches of  CDOs.

The real estate markets in the US and in the UK

Meanwhile the latest data from the United States suggests that house prices are still deteriorating, and in fact accelerating downwards. The big cuts in interest rates from the Federal Reserve will help with the re-setting of sub prime mortgages, making monthly payments lower, but falling house prices will be pushing defaults in the opposite direction.

In the UK, there are still worries that there could be sizeable falls in residential property prices as the year progresses. But of more immediate concern is the situation in the UK commercial property market. Many funds in the UK have suspended redemptions because so many investors were pulling their cash out. Suspending redemptions will help avoid a firesale of property assets, but all reports suggest that there has been a sharp drop in commercial property prices across the UK over the past six months.

Successful sale of Driver Five

Investors are very cautious in such an environment, but there was one piece of positive news recently, in the form of the Driver Five auto loan deal from Volkswagen Bank.

Volkswagen Bank has issued a number of deals since the market disruption began last year, but has up to now pre-placed all this paper. But with market sentiment on German consumer and auto collateral looking fairly positive, it was able to successfully sell Driver Five in the public market, though analysts suggest that it was careful to ensure the success of the offering by lining up some firm investors during the pre-marketing period.

The deal came at the short end of the curve, with a Weighted Average Life of 1.95 years on the senior tranche, and good demand enabled the transaction size to be increased to Euro1.25bn from Euro1bn. Pricing was roughly in line with current secondary market levels for auto paper. Marketing talk was around 60bp, and the Triple As came at 58bp over Euribor. The Single A tranche printed at 140bp. 

It is likely that more auto issuers will be able to access the market in the coming months, with auto paper being one of the few assets classes currently in favour with investors.

Retained or pre-placed deals still dominating the market

However, retained or pre-placed deals will continue to dominate in the first quarter, including more Spanish RMBS retained to be used as collateral with the European Central Bank.

In Germany, the recent Euro1bn PB Consumer 2008 deal was a securitisation of unsecured consumer loans, originated by Deutsche Postbank. All five classes were retained.

Rabobank is rumoured to be putting together a mega RMBS transaction that could total Euro30bn, but will be used as collateral with the ECB.
Very few publicly placed deals are anticipated in the first quarter. Australian RMBS deals have continued to be launched, but they are being sold domestically, and not placed heavily into Europe as was the case over the past few years.

At the moment the negatives far outweigh the positives in the securitisation market, and this is being underlined by yet more widening in secondary market spreads.

Over the past few weeks prime Triple A rated UK RMBS tranches have moved out from 65bp to 75bp, while Spanish deals have widened from 100bp to 120bp. UK non conforming Triple As have moved out from 175bp to 200bp.

And at the Triple B level many tranches are trading at distressed levels, with prime Spanish RMBS moving out another 50bp to 550bp, and UK non conforming tranches out 50bp to 800bp.

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