For the last three weeks the European ABS market has been seemingly bereft of new issues, but lurking in the quiet has been a growing pipeline that is set to erupt.

According to Morgan Stanley, despite a quiet start, volume figures for the first two months of the year nearly reached the record levels of $10.3 billion reached last year. "The pick-up in activity comes as no surprise, given that quarter-end considerations will be coming to the fore of issuers' minds and given the long lead times involved in putting European transactions together; it is uncommon to see much issuance in the first two months of the year," said analysts at Morgan Stanley. "This is because bankers spend the last few months of the previous year working on transactions which need to be completed before year-end."

Given the immense volume generated at the end of last year with deals such as the securitization of the sizeable Italian real-estate portfolio, some market participants said that most of January was spent just putting the finishing touches on those last-minute transactions.

However, it did not manage to curb what has been noted as strong investor appetite for European securitizations, which is indicated in the over-subscription and tight pricing of deals that have made it to market so far this year.

In the latest wave of deals, U.K. RMBS issuer Northern Rock brings to market its GBP2.4 billion deal, the third under its Granite master trust structure. The transaction is issued in 11 tranches that include dollar-based pieces, sterling-based pieces and Euro-based tranches that were all received well by investors. "All tranches came in tight or tighter than price talk, reflecting the buoyancy of the European RMBS market," reported Dresdner Kleinwort Wasserstein. "These spreads look tight on a historical basis and this is evident when comparing these launch spreads to those of the last Granite deal and indeed those of other issues out of the big U.K. master trusts."

The series I $2.1 million tranches priced its class A notes at 10 basis points over the three-month Libor; Class A2 at 16 basis points; Class B at 33 basis points and Class C at 130 basis points. The series 2 GBP513.7 million tranches priced its Class A notes at 20 basis points over the three-month Libor; Class B notes at 35 basis points; Class C notes 130 basis points and Class D notes at 450 basis points. The Series 3 EURO650.4 million tranches priced its Class A notes at 21 basis points; Class B notes at 35 basis points and its Class C notes at 130 basis points.

Despite the deal drought, investor skepticim is still to be demonstrated on shakier assets such as last week's Banco di Sicilia's NPL, Island Finance 2 (ICR 7 S.r.l). The offering was co-managed by Morgan Stanley and Mediocredito Centrale S.p.A.

The EURO345 million transaction priced its class A notes at 60 basis points over the six-month Euribor; the Class B notes at 100 basis points; the Class C notes at 165 basis points and the Class D notes at 275 basis points.

Much of the hesitation stems from the portfolio concentration, despite the fact that the first deal that came within this series performed to expectations. "Investors are still very selective when it comes to non-prime assets and the 90% concentration is Southern Italy was unlikely to have helped matters," said analysts at Dresdner.

Last week Fitch Ratings placed all five class of the ICR 5 S.r.l on ratings watch negative based on a decline in cumulative net collections relative to expectations and concerns over future collections.

Pipeline

What's promising, however, is the robust pipeline that brews. Despite the withdrawal of U.K. water company Southern Water earlier this month, there is a healthy augmentation of deals, said one source.

Among those marketing last week was an Italian RMBS deal, Orio Finance No.3, issued by Banca Popolare di Bergamo-Credito Veresino and managed by SSB. The deal is being offered in two floating-rate tranches with a legal maturity of August 2015. It's a true sale, where the notes are backed by a EURO390 million RMBS note issued by Albenza 3 S.r.l that are backed by a static pool of Italian first-lien mortgages originated by BPB. The notes are alternatively backed by a EURO55 million pool of triple-A rated U.K. RMBS issued by Holmes financing No.1 and 2.

A German auto loan receivables transaction, Global Drive B.V., was also counted in last week's pipeline. ABN AMRO, Deutsche Bank and West LB are managing the deal. The EURO800 million offering will be issued in two tranches of floating-rate notes and is counted as the largest securitization in the series, which has issued three prior deals.

According to Dresdner, the first deal was backed by U.S. assets, the second by German assets and the third, Global Drive (UK) plc, used an alternative SPV and securitized U.K. loans. The current transaction will consist of prime residential mortgages on investment properties located in the U.K.

Finally, Paragon Mortgage, a U.K. RMBS deal, is also out and is managed by ING Barings. The deal totals GBP500 million and is issued in two floating-rate tranches with a final maturity of July 2032 and July 2044.

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