Barclays Capital analysts said that the European ABS market faces a number of serious challenges from technical, fundamental as well as structural factors.

Combined with uncertainty around the details and impact of government policies and the potential of further ratings downgrades, analysts expect that there could still be significant selling pressures, especially for banks.

But when meeting with its ABS investor clients —  70 clients in 19 cities and 10 countries over the last seven weeks —  analysts found some new investor interest is starting to emerge.

Most investors are focusing on their home jurisdiction, because it's easier to get approved by senior management and risk departments, according to Barclays analysts.

In general, Spanish investors are bigger buyers of Spanish RMBS and Dutch investors are focused on Dutch RMBS, etc.

Most investors have also refocused their attention on closely monitoring their existing portfolio (with the helpful assistance of their risk colleagues) and are not reinvesting most of the cash prepayments on their existing ABS holdings.

But a number of other more positive things are developing below the surface, said analysts. "We are seeing some green shoots of new investor activity, especially with U.K. and Dutch pension funds and insurance companies," analysts said. "A number of U.K. and European fund managers are attempting to raise capital for distressed debt and ABS funds. Some are also increasing existing ABS mandates or increasing the percentage permitted to be allocated to ABS.

"Although limited in size, these initiatives are likely to be the start of a slow revival that can be expected to unfold over time," analysts wrote. 

It's likely that any increase in buying activity to be cautious and slow, particularly on the higher-rated tranches.

On the subordinated tranches, Barclays said a quicker recovery may be in order if hedge funds are able to pick up any heavily discounted portfolios in size from highly motivated (bank) sellers.

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