Concerns that Abbey National plc's unsecured debt ratings downgrade might impact pricing for its subsequent securitization became unfounded last week as its latest deal priced in line with HBOs' Permanent Financing 4. For market participants looking at the deal as a spread indicator, 14 basis points over Libor looks like the tightest levels for triple-A U.K. RMBS names at the moment.
"Spreads generally are thought too tight, but [the] need for assets keeps participants returning," reported analysts at Morgan Stanley. "However, selling premium bonds in secondary markets remains a difficult proposition. This lackluster demand for seasoned, but premium, assets solidifies our view that at least a pause in spread tightening is due." Abbey paper typically prices a bit wider than the Permanent series, at 14 basis points for the triple-A piece, industry sources said the guidance levels probably indicated a tightened market for the HBOS paper.
But sources added that Abbey's spread levels quieted concerns that investors might be full on U.K. RMBS master trust paper, on the secondary level, both the Permanent paper and Granite paper traded higher, but market sources added that it was unlikely spreads would come in any further in the short term. Holmes' dollar-denominated short-dated money market tranche, that accounted for 25% of the transaction, priced at five basis points under Libor, and its 2.8-year and 4.8-year triple-A rated U.S. dollar-denominated tranches priced at eight over and 14 over Libor, respectively. Class A euro- and sterling-denominated notes both priced at 15 basis points over Libor for 4.3- and 4.8-year average lives, respectively.
"The repricing of European ABS reflects strong credit fundamentals and a reasonably strong economic outlook," said analysts at JP Morgan Securities. "We expect spreads will tighten marginally further, but believe this process could take the remainder of the year. Market technicals remain extremely supportive, and demand should continue to outpace supply."
Last week also saw the nonconforming issue from Leek Finance price its triple-A paper at 22 basis points, its single-A piece at 80 basis points and a triple-B tranche at 165 basis points. It's considered one of the higher-quality non-performing names in the U.K., said sources, who added that investors did note the lack of yield usually found in this sector.
Issuance began to slow down by midweek, following the Holmes deal pricing, with only 5 billion (US$6 billion) in new paper circulating by the week's end. Names included a sale and leaseback transaction from U.K. supermarket retailer Tesco. The GBP675 million (US$1.2 billion) deal will be backed by 33 retail stores and two distribution centers located throughout the U.K. The deal will be placed via Morgan Stanley. The capital structure will include GBP382.5 million (US$692.3) of single-A rated notes linked to the Tesco credit rating. There will also be GBP250 million (US$452 million) of class B1 and B2 unrated bonds. The class A and B1 notes are fixed rate, and the B2 is floating rate but will be swapped back to fixed rate.
A new Scandinavian CMBS deal is also in the pipeline. Nor Scan Properties 775 million (US$943 million) Midgaard Finance Ltd. will be backed by 13 properties located on four sites in Sweden, Finland and Norway. It's split into two double-A minus rated pieces. The Citigroup Global Markets-led transaction is the second CMBS deal to emerge from the region thus year.
Roadshows commenced for BNL's 1.25 billion (US$1.52 billion) RMBS, Vela Home II. The senior notes will be issued in fast-pay and slow- pay tranches; v500m of the senior notes will be issued via a 2.2-year fast-pay tranche and 700 million (US$852 million) of the notes will be issued via a 7.8-year tranche. Vela Home's portfolio has a LTV of 50% and 2.5 years of seasoning. The notes will be issued via BNL and the Royal Bank of Scotland.