There's been no shortage of RMBS supply in the European securitization market so far this year, yet industry accounts still point to an unstated demand among investors that continues to drive pricing in, despite the heavy calendar ahead. But will changing market dynamics be enough to calm the consumer frenzy?
So far, the market maintains a voracious appetite for consumer assets in general, and industry sources argue that, although the migration to consumer from corporate credit may have been justified under the corporate credit buckling that began in 2001, market dynamics today are quite different. "For the past four or five years the market has been dominated by a rather benign core consumer credit environment but it's likely to change this year," said one industry source. "Still, expect a lot more activity from the consumer sector before investors become comfortable with the corporate credit cycle."
According to analysts at ABN Amro, further tightening cannot be justified by credit fundamentals in any consumer asset sector. While market fundamentals remain favorable today, it's unlikely that the climbing consumer debt burdens and housing market inflation will create a scenario where performance would be stronger than the anticipated loss curves for consumer assets over the life of the transactions, explained analysts.
"At ABN, we do not believe that further tightening can be justified by credit fundamentals in any consumer asset sector," reported analysts at the bank. "We expect, at best, market performance from the broad range of consumer securitizations. At worst, individual sectors or names could come under significant mark-to-market pressure from either headline risk or weakening collateral performance."
Despite headlined concerns tied to housing market fundamentals (see ASR 8/11/03), buyside interest and pricing for RMBS paper remains strong. According to last week's Deutsche Bank Securities' securitization market report, RMBS is the "biggest beneficiary" and has seen many issues, such as Granite, Lothian & Pelican, tighten by one to two basis points. But the sector continues to trade at a concession to short-dated auto/consumer paper with top-tier auto trading at historic tights and one- and two-year paper talked at 11 basis points and 12 basis points, respectively.
"If anything, RMBS paper should be trading tighter - it's still cheaper than auto and credit cards," said one source. "In Europe, [RMBS] is the staple of the market especially in the U.K. that is by far the stronger performing market." Even in the event of a housing slowdown the ultimate loss to these structures should be minimal, and investors remain comfortable despite the concerns about house prices.
Moody's Investors Service earlier this month published its outlook on the U.K. mortgage sector and highlighted that a significant increase in mortgage delinquencies is unlikely given the current market dynamics. "Parallels drawn between the current situation and the late 1980s - when rapid house price increases were followed by price falls, a rise in mortgage delinquencies and a decline in lenders' profitability - are misplaced," said Andrew Cunningham, the author of the Moody's report. Further, considering today's market dynamics - low unemployment rates and favorable interest rates - Moody's does not expect the asset quality problems of the 1990s to be repeated.
Nonetheless U.K. levels of RMBS remain flat, perhaps indicating that while investors acknowledge superior U.K. liquidity at the triple-A level they also understand that there is greater exposure to house prices at a subordinate level, said analysts at ABN. The industry need only look at widening among the nonconforming U.K. RMBS sector. And the dearth of Spanish RMBS, which sent pricing five basis points tighter than Portuguese RMBS paper last week, may indicate that investors are aware that the volume in supply may present an opportunity to be more selective.
But there is also a growing confidence among investors for corporate credits, particularly among vanilla structured corporate credit. "Our concern is that the market in consumer assets is tight and we [see] little scope for further tightening," said analysts at the bank. "Consequently, we favor corporate sectors that have fallen from market favor, but where credit fundamentals are sound."
According to Standard & Poor's, the market for corporate securitization has maintained its appeal. In the first eight months of 2003, the agency rated 11 transactions totaling approximately GBP7.16 billion (US$12.6 billion) with transportation and water utility whole-business deals dominating market issuance. The outlook remains favorable with a number of new transactions lining up that will likely include a new pub deal, expected to come to market before year's end. And on the CDO front, a pickup in secondary trading could end the liquidity crisis that has contributed to the past negative performance of these transactions, said one analyst.