Barclays Capital gave some insight into just how much the European investor base has shrunk.
The Barclays European ABS Research team went on a “research roadshow” this year, and for the past few weeks met with ABS investors all over Western Europe, with the goal to get a better sense of who among the many holders of European ABS bonds is still investing actively in ABS.
They found that the active European ABS investor base has shrunk from its peak by 10 to 15% from where it was at pre-crisis levels.
Barclays grouped still active investors by geography, by institution type and by investment philosophy. The group said that it was immediately apparent that investors based in the U.K. and the Netherlands are vastly more active than investors in any other European jurisdiction.
These two jurisdictions were among the very last to introduce covered bonds legislation and have traditionally relied on securitization rather than covered bonds as mortgage-specific funding instruments. As such, the ABS investor base in these two countries has always been extensive, whereas the covered bond investor base has been smaller.
Other jurisdictions showed far less activity. Analysts found that the active investor base in Southern Europe was so small that bond demand in these jurisdictions, particularly in Spain and Italy, appeared to have recently come mostly from originators rather than investors, usually in the form of public tender offers or private buy-backs.
Only a few banks, some supranational development banks, the insurance companies and the pension funds have remained active investors in ABS. The primary investor base is made up of roughly one-third banks, one-third insurance companies and one-third funds in the widest sense of the word. Most of these are located either in the U.K. or in the Netherlands.
"We see only tactical investors as a significantly active investor base in European ABS, most of whom are located in the U.K. and the Netherlands and consist of banks, insurance companies or pension funds," said analysts. "They are, however, merely reinvesting amortization cashflows and mostly limit their activity to senior bonds and 'safe' sectors.
"The strategic investors are frequently banks, some of whom are benefitting from government funding and are willing to let go of bonds. While each individual institution in this group is selling only a few bonds, their sheer number means that as a group they are selling enough bonds to generate the secondary market liquidity our asset class now enjoys, at least at the senior level of the capital structure. In fact, as best as we can tell, secondary trading flows are made up to a very significant extent of bonds migrating from the strategic investor base to that tactical investor base."