Analysts at Bank of America Merrill Lynch recommend that investors in European structured finance deals add more risk to their portfolios by pushing past the safer terrain of mezzanine tranches in the core countries and senior tranches in the periphery countries.
Their suggestion is for buysiders to skip down the capital stack of core-country deals into the lower mezzanine tranches, while “selectively” going for upper mezzanine notes in the periphery.
“We see this shift as most applicable to consumer credit securitizations — ABS and RMBS,” the analysts said.
They expect demand to stay strong amid primary supply that remains thin despite the issuance last week of four deals from different asset classes. As a result, BofA Merrill analysts do not expect the spread softening that generally rears its head in December to do so this year. The overall positive tone — buoyed by the recent rate cut from the European Central Bank — could also spur issuance from originators in the peripheral European countries.
At first this will be from “stronger names and in a private placement or club format,” the analysts said. But should spreads get tighter, “more securitization deals will become economically possible and potentially executed publicly.” In such a scenario, the sectors in the periphery ripe for issuance would include unsecured consumer, auto and lease assets. Residential mortgages would be tougher to bring back.
Another round of long-term refinancing operations (LTRO) from the ECB in the New Year would add further support.
To this upbeat outlook the analysts offers a caveat: any “surprises” out of Washington.