EUROPACE ABS Monitor

07 Aug 2008

Investors take a wait and see stance

The August holiday period has arrived in the European ABS market, with very little investor appetite for either primary offerings or the lists of tranches up for sale on the secondary market.

The wait and see stance of investors has been strengthened by the latest losses on subprime holdings announced by US and European banks, as well as further writedowns associated with Collateralised Debt Obligations.

The focus is now on whether a more active pipeline will be seen in September, and on into the fourth quarter.

Dutch RMBS remain the most favoured asset class

Dutch mortgage originators could be best placed to re-open the market, if spreads can tighten in 20bp or 30bp from current levels.

Dutch RMBS are viewed as the strongest and most liquid European ABS asset class. Triple A tranches are listed at around 95bp, compared to 160bp for UK tranches, 200bp for German tranches, and 225bp for Spanish tranches.

The Dutch market has some of the best fundamentals in Europe, with conservative Loan To Value ratios and a generally high standard of lending criteria, especially from prime mortgage originators.
 
One analyst points out that Dutch Triple A tranches look very well protected, but adds that some other jurisdictions may offer better value given the extremely wide spreads.

However at the Triple B level, where UK tranches are listed at 650bp and Spanish tranches at 800bp, there are fears that continued deterioration in economic conditions and falling property prices may lead to losses. In contrast, at spreads around the 500bp level, the analyst suggest that prime Dutch Triple B rated tranches offer excellent value for any investor braver enough to move down the credit curve.

The only other asset class to match Dutch RMBS in terms of spreads is auto loans/leases, which are also trading at a 95bp margin.

Negative outlook for credit card deals

Credit card tranches continue to be viewed with caution by investors, who fear that the negative effects of an economic slowdown and credit squeeze on households have hardly begun to filter through yet.

In the UK credit card sector, rating agency Moody’s has forecast that ABS pools are likely to deteriorate in the coming months, in spite of the relatively stable credit card indicators reported for the month of June.

Card accounts are typically charged off after being delinquent for over 180 days, so reported charge-off levels lag significantly behind current visible economic stresses.

The negative outlook on the UK card sector from Moody’s is primarily driven by the challenging UK economic environment, increasing costs of living, decreased availability of credit, and high leverage levels of UK consumers.

Analysts note that UK households are the most heavily indebted in Europe, and overstretched borrowers are coping with big jumps in petrol prices, food price inflation and electricity and gas bills. Last week British Gas announced a 35% increase in gas prices to its retail customers, the single biggest increase ever recorded.

Limited primary market activity

In recent primary market activity, there was a Euro1bn publicly placed Small and Medium Sized Enterprises (SME) CLO deal backed by loans randomly selected from the HVB Luxembourg portfolio. The loans were highly diversified regionally and by industry. The Euro912m senior tranche, with a Weighted Average Life of 3 years, was priced at Euribor plus 100bp.

There was also a Euro1bn static pool German auto deal from Banque PSA Finance, with the Euro970m Triple A tranche priced at a 90bp spread over Euribor.

And in the CMBS sector there was a small Euro150m tap issue from Dutch issuer Vesteda Residential Funding, which printed at a 150bp spread for Triple A rated bonds. The five years average life was at the long end given current market conditions.

But most deals from European banks continue to be retained for repo collateral. The domestic Australian market is busier, with some originators willing to pay high coupons of around 110bp at the Triple A level in order to get deals away.
 

More writedowns from US and European banks

The latest round of write-offs by banks relating to subprime mortgages and CLOs have also strengthened the tendency among ABS investors to stay away from the market, and wait for any further bad news to emerge.

The huge new writedowns recently announced by Merrill Lynch are a welcome sign that banks are aggressively moving to fully address the problems in their subprime and ABS CLO portfolios. In late July Merrill sold $30.6bn face value of CLOs to private equity house Lone Star for a purchase price of only $6.7bn, or 22% of face value.

Meanwhile the auction of assets from bankrupt Structured Investment Vehicle Cheyne Finance, which is being run by receivers Deloitte & Touche, failed to spark much interest at acceptable price levels.

The portfolio of $5.86bn face value worth of bonds was split into eight risk buckets, with firm bids invited for each bucket. No bids were allowed on individual tranches. The Cheyne assets were heavily concentrated in structured credit, plus monoline wrapped ABS. With most investors sitting on the sidelines, only $1.23bn worth of bonds were sold. The rest have been put into a new vehicle named Gryphon.   

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