With Christmas week looming closer, more European ABS deals will likely fall into next year's line-up. It won't only be the pipeline bustling in 2003, however; analysts expect to see a number of ongoing trends take hold as well, said analysts.
Over the past weeks, a number of transactions have had to postpone active marketing. A E1.2 billion Italian real estate and equipment deal was the latest deal to postpone its issuance until sometime in January, said market sources. Separately, Bankinter announced its fifth transaction, but market analysts expect that bank will retain the senior class bonds due to current conditions. It's unlikely that the notes would do as well as the previous transaction from Bankinter. That deal, which priced in September, priced class A notes at 22 basis points over Euribor.
"Since October, the calendar has been extremely rigorous, adding pressure to spreads," said analysts at Royal Bank of Scotland. "The spottiness of the calendar has proved painful for investors and for issues. In certain cases, issuers have decided to wait out the market or have pulled deals from the market."
After a virtual lull following September 2001, year-end issuance hit high volumes in December of last year, comparable to the current pace. The activity spilled over into the beginning of 2002; as dealers spent the first months closing deals, the new issues calendar did not pick up until March. "Spreads tightened fairly dramatically [in the beginning of 2002] in the face of no supply," said analysts at RBS. "Even once the issues came to market, spreads generally held their own through summer." This supply-and-demand imbalance may hopefully find some resolution next year, when analysts say investor demand is expected to meet growing market supply.
Servicer risks in 2003
Servicer concerns blew up alongside the increase in ratings volatility this year. Investors took note of what exposure transactions might have to third-party risks. This trend is expected to continue next year as investors plumb the resiliency of transactions in the face of ratings downgrade exposure. "As 2003 is likely to be another year of rating transition in the credit markets, we expect tiering to increase," reported analysts at Dresdner Kleinwort Wasserstein. "Individual credit assessment and structural features are more important than ever in order to differentiate between a weak deal and a bargain."
Analysts also expect secondary market liquidity to gain greater and sustained importance next year, as more and more players display a keenness for relative value.
"More investors using total-rate-of-return strategies have appeared, away from the traditional buy-and-hold style," said analysts at RBS. "These new strategies imply greater reliance on secondary market liquidity, but also when pricing assets." Transaction disclosure has improved via new online platforms emerging during the second half of this year, which market analysts hope will prompt liquidity in 2003.
Pipeline whittles down
The pipeline showed some signs of slowing last week, though the market moved ahead as new issues priced. On that front, a E271 million Italian lease receivable securitization for Mercantile Finance priced its class A notes at 42 basis points over Euribor and its triple-B notes at 120 basis points over.
"New trades this past week continued to print at wider clearing levels, reflecting the limited year-end investor appetite," reported analysts at Deutsche Bank. "However, most deals appear to have been fairly well subscribed at these cheaper levels in what can only be described as a buyers market."
Chaves Funding No. 3 priced in line with price talk. The triple-A rated class A notes came in at 33 basis points over Euribor. The E164 million Portuguese auto loan deal priced its single-A notes at 95 basis points over Euribor and its triple-B notes at 190 basis points over. The previous deal in this series did not carry a triple-A rated tranche.
Price talk was heard for Pelican Mortgages 1, a Portuguese RMBS transaction expected to price later this week. Guidance for the 5.4-year average life class A notes was given at 27 basis points over Euribor.
Market analysts said that better demand for cash versus synthetic CDOs has shown up in the form of wider spreads for equivalently rated tranches on synthetics, noting that CDOs continue to experience long marketing times (sometimes up to six months) to build investor confidence in the underlying credits and structural issues.
Part of the new issue line up last week was the E148 million managed arbitrage CDO, Jazz CDO II. The triple-A notes priced 80 basis points wider than original price talk at 55 to 60 basis points over Euribor. The double-A notes priced at 125 basis points over. The E241 million managed arbitrage Euro Multi-Credit CDO S.A. priced its triple-A notes at 53 basis points over Euribor. The double A notes came in at 100 basis points over and the triple-B notes priced at 325 basis points over.
