Europe continued to see its primary securitization pipeline move toward recovery with strong issuance dominating the market in October.
Securitization analysts said that if the positive broader market technical backdrop persists, ABS should rally into year end.
"Markets continue their bullish stance," Unicredit analysts said. "The overall market tone is strong, and risk appetite is continuously increasing as liquidity is abundant, while yield has to be locked in."
Not even U.S. foreclosure problems have dampened expectations.
Additionally, investors' search for yield in the reasonably priced ABS market should continue to support the healthy European pipeline.
"In thinking about contagion risks into Europe, we believe the U.S. non-mortgage ABS market has become a far more meaningful benchmark for European ABS/RMBS and U.S. vanilla ABS has proved immune to 'foreclosuregate', thus far at least," Royal Bank of Scotland analysts said. "The question as to whether similar deficiencies in documentation exist in Europe is likely to be asked before long - any such discussion is outside the scope of this commentary, however we would point to the fact that mortgage lending and servicing businesses are regulated in Europe, in our view a key distinction to U.S. non-agency mortgage practices."
The ABS deal pipeline is clearly positive, and even though there might be some saturation effect among investors, the hunt for yield will allow healthy issuance.
On the primary side, the 1.6-year triple-A notes of GMAC Bank's new German Auto ABS E-CARAT 2010 transaction priced at the wide end of guidance at 125 basis points over the one-month Euribor.
According to market talk, the deal was fully placed. The reason why the transaction closed at the wider end is related to the originator, which is not considered to be top-quality.
Close to launch and pricing is Nationwide Building Society's U.K. prime RMBS Silverstone 2010-1 transaction, which is worth £1.5 billion and managed by Bank of America Merrill Lynch, Deutsche Bank and UBS.
Guidance for the three triple-A classes are: the A1 $550 million, three-year tranche at 140 basis points over the three-month Libor; the A2 €1.1 billion ($1.51 billion), five-year portion at 150 basis points over the three-month Euribor; and the A3 $300 million, five-year portion at 150 basis points over the three-month Libor.
Santander U.K. has mandated BofA Merrill, Barclays, JPMorgan and its own investment banking unit for their new Holmes Master Issuer 2010-1 U.K. RMBS, which will feature euro, dollar and sterling tranches.
The transaction began roadshows in the last week of October in Europe and the U.S. The deal is expected to launch and price around early November.
"Considering the large volumes in the sector with a new Holmes deal in the pipeline, this is another legacy of the U.K. RMBS investor base," Societe Generale analysts said.
Secondary market trading has seen spreads remain stable despite the uptick in primary market volumes.
According to Unicredit, in the U.K. prime RMBS space, the Granite Master Trust triple-As are trading lower at 93.15/93.25 (-0.20), while the recent ARKLE 2010-2X triple-A notes are trading slightly above par across all currencies.
"In the context of not insubstantial new-issue supply and a still limited investor base, the price performance of senior bonds is impressive," Deutsche Bank analysts said.
Market reports have indicated that Granite triple-Bs crossed the 50 price barrier for the first time this year. "Among European ABS, the mezzanine market currently best typifies the seemingly insatiable search for yield that continues to drive the rally in all risk assets," Deutsche Bank analysts said.
Liquidity, according to Unicredit analysts, will be key for now.
"With underlying economic prospects suggesting a slowdown in the recent recovery, central bankers (particularly in the U.S.) are stepping up efforts to support the economy via additional monetary stimuli," they said.
Without debating whether a second round of quantitative easing can support real economic growth, they said that it has become clear that the short-term implications - further declining yields and a low growth environment without a double-dip recession - will probably lessen the credit risk inherent in ABS transactions.
They added that micro-fundamentals with in terms of earnings in the corporate and financial sectors are thus far "very satisfactory and supportive."
Over the longer term, Unicredit analysts said that Europe's sovereign crisis and its impact on private consumption could change the course for ABS technicals.
"The austerity measures implemented across Europe in combination with rising risk aversion due to political tensions and external developments like the U.S. foreclosure crisis could potentially impact credit spreads and prices, which could weigh on ABS prices as well," analysts said.
