Given sluggish issuance of structured finance deals in Europe so far this year and the scant prospects of a near-term reversal, the analysts at Bank of America Merrill Lynch have revised down their structured-finance issuance forecast for 2013.
The new 2013 full-year projection is €120 billion ($154 billion), compared with €135 billion previously.
The first half of the year showed a drop in issuance, primarily due to plunging activity in the RMBS sector, a function of the Bank of England’s funding for lending scheme. (See table below) “In particular, there has been a lack of consumer (excluding auto) ABS from the UK this year, and very little RMBS,” the analysts said.
But the FLS does not hold all the blame, with weak loan demand also a factor.
Unsurprisingly, peripheral Europe was not able to pick up the slack. Most deals from the beleaguered countries of the continent were retained (i.e. used for central bank funding) and in the SME sector, which the BofA Merrill analysts include in the CDO sector. One of the few bright spots in 1H was German auto ABS, which has been one of the most active parts of the European structured finance market.
One noteworthy trend in the 1H was the higher percentage of fixed-rate, as opposed to floating-rate, issuance. Several factors are at play here. “We have noted the increased difficulty of implementing hedges for fixed/floating rate mismatches with rating agencies tightening counterparty criteria, higher capital requirements for bank counterparties and increased capital requirements for CVA,” the analysts said.
The bank also cut its covered bond forecast for the year, to €100 billion-€120 billion from €150 million.
The scant fresh supply of deals is “likely to exacerbate the supply-demand imbalance on both markets, thus technically supporting spread levels,” the analysts said. “In the SF markets, this will be partially offset by the pick-up in BWIC (Bid Wanted in Competition) volume on the secondary.”