EUROPACE ABS Monitor

21 February 2008

Spreads widening out even more

Negative newsflow continues to weigh down on the European ABS market, and market sentiment has worsened over the past month, with technical factors leading to dramatic spread widening.

Primary activity is almost non-existent, and spreads in secondary have widened out to levels that few traders would have forecast at the beginning of January. Prime Triple A rated UK RMBS have shot out 35bp in the past month to hit 100bp. And Spanish Triple As have moved out 35bp to 175bp, with Spanish Triple Bs now listed at 650bp.

Have the writedowns been aggressive enough?

From a fundamental point of view most analysts see no logic in the wide spreads at Triple A level, even if there are some credit concerns at the Triple B level.  But as one analyst points out, the market has stopped listening to positive news, while instantly reacting to every piece of bad news.

There had been hopes that the reporting season, with a mix of good and bad results, would bring with it some sense that the banks have fully addressed their problems, with further writedowns clearing the decks for a recovery in what remains of the first quarter.

But Credit Suisse unnerved the market after it published unexpectedly good full year earnings for 2007, and only a week later announced another Pounds1.5bn writedown associated with mark-to- market pricing on Collateralised Debt Obligations and RMBS. A group of London traders have been suspended while an internal investigation takes place.

The events at Credit Suisse are just one example of the fundamental problem within the securitisation market, which is that investors remain continually nervous that more potential losses are hidden away on bank balance sheets, and that the banks have not been aggressive enough in their writedowns.

At the beginning of the 2008 analysts were pointing to wide Triple A spreads as offering fundamental value, but spreads have since moved out much further than anyone had predicted, leading to sizeable mark-to-market losses on anyone who bought in January. Against this background, few investors are currently willing to add to their ABS positions, and there is an almost complete drying up of liquidity in the European market.

Liquidity support to Whistlejacket

One sign of just how fast the market has deteriorated was the recent fall into receivership (UK bankruptcy proceedings) of the Whistlejacket Asset Backed Commercial Paper conduit run by Standard Chartered Bank.

Standard Chartered had announced at the end of January that it was to provide liquidity support to Whistlejacket, and this facility was expected to be put in place by March.  But on 11 February the vehicle breached its Capital Value trigger, reducing the necessary overcollateralisation available to senior debt investors. Standard Chartered must now work with the receivers on an alternative restructuring plan.

As rating agency Moody’s notes, ‘while the underlying assets of Whistlejacket have not thus far suffered credit losses, the unprecedented illiquidity in the market for asset backed securities has created a high level of uncertainty around the valuation of the assets.‘

Prices at the moment

Clarifying exactly where realistic market prices are in the current environment is very difficult, but indicative prices, often driven by small trades by investors liquidating assets, have been setting new records for the speed at which they move outwards. 

UK non conforming Triple As have ballooned out 75bp in one month to hit 250bp, while the Triple Bs are being listed at an incredible 1000bp, which is 300bp wider than one month ago.

Even Dutch Triple A RMBS have widened out 30bp to 90bp, and German RMBS by 20bp to a current level of 120bp. Triple A Portuguese RMBS have moved out 70bp in one month to 150bp, with Triple Bs moving out 175bp to 500bp.

These movements can hardly be justified by the fundamentals of the property markets in The Nertherlands, Germany and Portugal, which look potentially more stable than in countries such as the UK or Spain.

An analyst comments that the market is completely driven by technical issues, such as the unwinding of leveraged portfolios and worries about mark-to-market losses. Thus at the moment there is little appetite for fundamental analysis.

Restructuring of SIVs and downgrades

On a brighter note, HSBC has now completed the restructuring of its largest Structured Investment Vehicle, Cullinan Finance. Assets will be transferred into two new structures, Mazarin Funding supported by a 100% liquidity line from HSBC, and Barion Funding.

But the unresolved problems at the monolines are continue to undermine confidence within the ABS market. Moody’s recently downgraded FGIC by six notches from Triple A down to A3. It should make decisions to either affirm or downgrade Ambac and MBIA by the end of the month, though some analysts hope that if they are downgraded it will be to Double A rather than all the way down to Single A.

Ambac could be split into two separate units under a proposed restructuring. The main focus of regulators in the United States is the municipal bond insurance business, since this is crucial for municipalities to fund themselves. In contrast the structured finance units at some monolines could go into run-off mode.

Meanwhile the nationalisation of Northern Rock, instead of a sale to the Virgin group which had been widely anticipated, is generally seen as neutral for the Granite securitisation programme. The main question is whether Northern Rock will be downscaled or will continue to be a sizeable mortgage lender, with use for further Granite offerings at some point in the future. 

Deals in pipeline

In primary there was recently one privately placed RMBS transaction out of The Netherlands, but it says little about overall ABS investor sentiment, since the underlying mortgage loans are guaranteed by the Dutch government under the NHG programme. Indications are that half of the Euro800m worth of Triple A notes were sold, with the other half retained by originator SNS Group.  

Most of the few other deals being structured are being retained, as the Triple A tranches qualify as collateral for European Central Bank loans. BBVA 7 FTGENCAT was a Euro250m Small and Medium Sized Enterprises deal which was retained by BBVA.  And the Euro2bn IM Cajamar 6 FTA RMBS deal was retained by Cajamar.

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