Negative headlines persist. But despite the carnage, European securitization market players should start recognizing the signs of healing and get on board. Clearly, patience is key since the reparations needed to restore the market are likely to take some time.
The good news is that people are beginning to understand that the lack of liquidity, not negative credit migration, was the cause of most widening in European spreads. But even with this knowledge in hand, only senior plain vanilla sectors like U.K. prime and Dutch mortgages have tightened - and only modestly. Secondary flows remain thin, with no new issue in the European ABS pipeline since the start of 2008.
By contrast, trading has resumed in the U.S., although credit problems persist. This is probably because European institutions have other escape hatches. For instance, banks have been finding other ways to use the unsecured markets - they haven't been entirely dependent on the securitization market as some U.S. institutions had been.
Nonetheless, year-end 2007 securitization volumes tally up well when compared to prior years. According to figures reported by Societe Generale, European ABS market final primary volume figures for the full year have totaled roughly 385 billion ($564 billion). And if retained tranches are included, funded European structured finance deals amounted to about 440 billion. "The volumes remain large, demonstrating the importance of structured deals for the banks," SocGen analysts said.
The numbers mean that in the six months since the market started to feel the U.S. subprime pinch, deals were still getting done. Take Lehman Brothers, which last week announced a new loan modification program for its U.K. RMBS; it continued, even during 2007's most turbulent months, to securitize nonconforming loans, one of the riskier sectors in the market today. The crisis did not impact the timing of its transactions, a source at the bank said.
Even though the market has started to see an uptick in activity and the narrowing of secondary spreads led by Dutch and U.K. RMBS, much of this tightening is almost exclusively dealer driven, with very little retail demand behind the cash buying. "The false rally in October, when Dutch and U.K. spreads got into the high 20s, is still fresh enough in investors' minds to stop them from jumping headlong into a rally, and it seems that they would rather miss out on the first five basis points than get caught on the wrong side of a widening market," Dresdner Kleinwort traders said.
There is no denying that the market is taking a bad hit. But European players need to start recognizing the healing signs, the latest of which is the recent spate of investment bank recapitalizations. "The market is coming back to where it was," a European trader said. "Of course it will take time, but a lot of the unknowns are being known."
Throughout the coming year, market stability should gradually return. The slow and steady wins the race might not be as appealing as the fire and brimstone headlines that we read daily. But the subtle positive signs could serve as the balm that investors need to begin trusting again and, more importantly, to complete the healing process to get this market back to where it should be.
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