LONDON - Following a year dominated by the squeeze in spreads across all asset classes, market pundits are beginning to question whether market dynamics will maintain the tightening bias in 2005.
At a conference held here last week on its securitization outlook for 2005, analysts at Dresdner Kleinwort Wasserstein said that market fundamentals could still bring pricing levels in further from 2004 lows, where tightening was significant across the board - coming in between 40% to 60% from levels registered at the beginning of 2004. Spread differentials between asset classes largely disappeared in 2004, said analysts.
"Not only are the spreads on CMBS and non-conforming U.K. RMBS tightening on an absolute basis, they are also ebbing away much of the differential they historically paid relative to prime RMBS," reported analysts at ABN AMRO. "In contrast, the spread differential between RMBS and credit cards has remained relatively constant despite the tightening marketplace."
Issuance reached critical mass last year, with almost 300 deals hitting the market. But limited growth in 2005, issuance is expected to be on par with 2004 levels, and increasing participation in the European markets means the supply/demand scenario should continue to favor issuers. "If you want to hedge risks, you have to dig a bit deeper," said analysts at Dresdner. "Deals [were] heavily oversubscribed, even down the credit curve, which brought spreads in at those levels. The macro imbalances - paired with the corporate market cleaning up its act - has generated low volatility and spreads. If 2005 will look like 2004, the whole of leverage products will become more central than it ever was."
Last week, the market waited for its first benchmark print, with U.K. RMBS Granite Mortgages. On the back of strong market demand, price guidance was revised tighter, said market sources, and the transaction priced at the tight end of revised guidance. The triple-B rated C class saw significant interest in both euro and sterling denominations, leading to revised guidance at 56 basis points and 60 basis points over Libor, respectively.
The euro-denominated A class was revised to four basis points over Euribor for the one year dated tranche and 9 to 10 basis points for the 4.6 year dated piece. The sterling-denominated A class, with a 7.3-year average life, tightened to 12 basis points over Libor and the double-A and single-A rated tranche tightened to 19 and 28 basis points, respectively.
So far this year, indications have pointed to much greater demand for euro-denominated paper, which is expected to lead to smaller U.S. dollar issuance. The Granite deal reduced its U.S. dollar tranche to make room for greater euro and sterling participation. Sources said their was little demand for the dollar denominated C class at offered spreads, suggesting that typical U.S. dollar investors were attracted to higher yielding triple-B rated home equity ABS.
RCI Banque's 850 million ($1.1 billion) Car Alliance dealer floorplan deal priced tighter than guidance. The five-year A class came in at nine basis points over Euribor, compared to guidance in the 10 to 11 basis point range. The five-year B class notes priced at 21 basis points over Euribor, through guidance in the high 20 basis point area. CAF 05-1 represents Europe's first public dealer floorplan loan-backed ABS transaction and finances autos, equipment and parts for French Renault and Nissan dealers.
Marketing began for Eurohypo's Opera Financing program. The U.K. CMBS deal has GBP440 million ($821 million) of nine-year triple-A rated paper, GBP52 million of double-A rated, GBP40 million of single-A and GBP68 million of triple-B rated paper. The Royal Bank of Scotland also began marketing the GBP250 million EPIC UNITE securitization, backed by rental receipts from 24 privately owned student accommodation properties.
Also new in the pipeline last week was the 302.2 million Italian RMBS deal from Banca Poplare di Puglia e Basilicata.
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