The spread debate has been a favorite topic among investors and traders alike. There has been little to alleviate the tightening bias but last week's pricing on the Permanent Financing deal could signal investors' unwillingness to go down the tight path again.
Last week, Halifax PLC was marketing its ninth securitization under its Permanent Financing master trust. Credit Suisse First Boston, JPMorgan Securities and Banc of America Securities were the leads on the GBP4.18 billion ($7.3 billion) deal
Analysts at Dresdner Kleinwort Wasserstein said that this latest benchmark RMBS deal met with some market resistance. While the deal's subordinate tranches were well oversubscribed, the senior tranches were selling a little slower.
The last Permanent deal, which was issued around the same time last year, priced its triple-A euro piece at seven basis points - this signaled a turning point in the market where spreads reached record tights.
In the latest deal, the triple-A euro-denominated piece was not massively oversubscribed. Market analysts said investors might have exhibited caution as a way to widen spreads. "With absolute spread levels tight, and the new issuance pipeline on the increase, recent [book build progress] may suggest that, where possible, investors are scaling back their order sizes with the view to waiting until market conditions are more favorable again," said Alan Packman at DrKW.
Packman added that, as they have now witnessed several supply cycles since the market hit critical mass two years ago, investors generally appear to be handling the cyclical nature of ABS supply patterns more effectively.
Julien Mareschal at BNP Paribas said that the market largely expected the Permanent deal to come in at 10 basis points, even though it finally priced at 11 basis points for both the sterling and euro tranches. Although not wide - price talk on the deal was at 10 to 11 basis points - the spread levels signaled a weakening in the market.
Mareschal said that the market, in general, experienced a half basis point of weakening. "The European Central Bank raising rates hurts the trading industry," he said. "Players have no interest to hold bonds but then the market comes back and I think the market is already showing signs of stabilizing. I don't see it going any wider, I see it headed for tighter levels with the growing investor base." He added that the current Permanent deal was already exhibiting better secondary market performance compared to the last one.
Analysts at Barclays Capital reviewed the factors that have affected trends in the past and found that the correlation between corporate and primary ABS spreads could increase as the European investor base broadens to include buysiders simultaneously involved in both sectors.
Another factor that could be driving pricing spreads is the issuance currency. Analysts found that, in general, U.S. dollar denominated deals usually price at tighter levels compared to sterling- or euro-denominated pieces.
"On average, the dollar denominated bonds, across all ratings categories, priced 20 basis points tighter than euro or sterling denominated bonds," wrote Paul Geertsema at Barclays in a report looking at primary spreads in European ABS from 2000 to 2005.
Sterling- and euro-denominated issues showed similar average primary spreads. However, in certain asset classes, euro-denominated issues tended to price tighter than sterling-based ones.
"The limited supply of euro-denominated CMBS paper led to tighter spreads relative to sterling-denominated CMBS in 2005," explained Hans Vrensen at Barclays. "This may be due to a number of European investors being restricted from investing outside euro-denominated bonds."
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