EUROPACE ABS Monitor
17 April 2008
UK property sectors in decline
The steady flow of bad news out of the UK residential property sector has been a major theme in the ABS markets over the past two weeks.
During the boom years, UK RMBS was the single most important asset class within European ABS portfolios, so any deterioration in the credit quality of lower rated prime UK RMBS tranches will be severely felt.
After a quiet first quarter, during which the number of completed home sales fell by a third compared to the same period last year, sellers are finally being forced to cut their asking prices. The long awaited slide has now begun, which is in turn scaring away first time buyers who do not want to enter a falling market.
Average UK house prices could fall by 10% during 2008, and another 10% next year, according to some estimates, though the picture is changing very fast.
There are also big regional variations. Whereas London prices are falling less slowly at the moment, prices in regions such as the East Midlands are dropping rapidly, and could already be looking at a 20% fall in some badly hit areas.
The trend will mean problems for bank lenders and building societies with a strong presence in hard hit areas of the UK. Investors need to look closely at collateral pools in UK RMBS master trusts, and start matching regional price trends to the percentage of assets in the pool.
UK commercial property is also causing concern. The credit crunch has hit the investment banking sector hard, and with many analysts now looking to the fourth quarter before investment banking business starts to slowly pick up again, speculation about job losses is rife in the City.
A report from JP Morgan has suggested that as many as 40,000 jobs in the City could be lost as a result of the crisis on financial markets. This was double a previous estimate from JP Morgan, and would have a major impact upon London office property rentals and prices, and a knock-on effect for holders of CMBS tranches.
Property lender Commercial First stops lending
In a sign of the difficulties in the UK market, specialised commercial property lender Commercial First announced last month that it was stopping further lending, saying that the freezing of the capital markets mean that there is a shortage of new funding.
Between 2004 and 2007 Commercial First did a series of CMBS transactions under the Business Mortgage Finance (BMF) name, and has Pounds1.79bn worth of CMBS outstanding. Nonetheless Moody’s affirmed the ratings on the exiting deals, which are backed by relatively granular and diversified portfolios of UK commercial mortgage loans.
Markets digest further bank writedowns
Elsewhere, the financial markets are awaiting the latest set of writedowns from major banks, following the recent announcement of an additional $19bn worth of writedowns at UBS.
Citigroup reports later this week, and has been tipped by some analysts to announce another $11bn worth of writedowns. And Merrill Lynch, which was one of the biggest investors in CDOs, is forecast to come up with another $4bn to $6bn worth of writedowns. Merrill has thus far written down $24bn, the most by any US bank, though less than the $37bn total figure for UBS.
Even if the numbers are bad, the markets simply want the problem to be fully addressed, and have grown tired of banks coming back with more writedowns each quarter, always leaving an overhang of bad news to undermine confidence.
Last week Citigroup agreed the sale of a $12bn portfolio of leveraged buyout loans to a group of private equity investors, offloading them at 90 cents on the Dollar, while also making large loans to the private equity houses to fund the transaction.
Analysts note that Citigroup is showing a willingness to crystallise losses in order to get the problem resolved, and hope that other banks will follow their example. And the fact that private equity investors are now looking to pick up cheap assets is seen as a welcome sign that some buyers are actually returning to the loan markets, after a first quarter when it was very difficult to complete sales of loans or ABS tranches regardless of price.
European secondary ABS margins begin tightening
In European secondary market trading, Dutch Triple A RMBS tranches have showed some improvement recently, and have tightened in 40bp in the past month, to 110bp over Euribor. In contrast, more bad economic and housing market news from Spain has pushed Triple A prime Spanish tranches out to 250bp.
This movement was partly due to the downgrade by Moody’s of some of the lower rated tranches of the Madrid RMBS 2 transaction. The originator Caja Madrid has a generally good reputation, and the deal has a 67% concentration in Madrid, but this was a high Loan To Value transaction, and the deteriorating property market and rising delinquencies is putting pressure on the junior tranches. The A1 rated tranche was downgraded to Ba1.
In secondary trading prime Triple rated prime UK RMBS tranches had edged in 10bp last week to around the 160bp level. But the news from the UK property market is now relentlessly bad, with the arrival of a property crash now taken up by the press on a daily basis. This newsflow may further undermine the confidence of investors who had seen some buying opportunities, and make them sit on the sidelines rather than explain
New European primary issuances
In primary, Spanish banks continue to structure securitisations for use as collateral for European Central Bank funding.
There was also deal out of The Netherlands, with E-MAC announcing a transaction that included a $98m Triple A rated 3.8 year tranche at 155bp. Analysts suggest that the notes were able to be placed at those levels, but point out that at such wide spreads the pipeline will be very slow.
German E-MAC DE on negative watch
Meanwhile Fitch has placed all 19 tranches of E-MAC DE deals from 2005 and 2006 on Rating Watch Negative. Germany has had much more modest growth in house prices than most other European countries, and is less exposed to a sudden downturn in asset values. But GMAC-RFC entered the highly competitive German mortgage market as a lender to second tier borrowers, and has been experiencing a spike in arrears.
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