European ABS volumes look ready to hit another record this year - nearly $350 billion according to market sources - as the December pipeline resists the holiday lull. Pricing spreads are expected to see a repeat of late 2004 and withstand supply pressure as consistently strong demand drives pricing on ABS bids.
Over the past 10 years compound annual growth of European ABS has exceeded 30%, according to analysts at Morgan Stanley. Firm growth is expected to hold in 2006. "We view ABS as a defensive asset with the added plus of holding a nominal spread advantage over similarly rated corporates," Morgan Stanley analysts said. "In the stable spread environment of this year, European ABS have outperformed corporates on a total return basis by about 0.2% year-to-date. Next year, we expect a similar result if spreads remain range-bound, and even better ABS relative performance should credit spreads widen."
The visible pipeline tops 26 billion ($30.6 billion), as secondary markets have picked up and adjusted to a firmer tone. Market sources reported that Dutch and Spanish RMBS remains better bid, particularly for recently printed paper. ABN Amro's upcoming 22 billion ($25.8 billion) Dutch RMBS, SHIELD, has sparked a relief rally on the secondary front. The deal, which has on offer 4 billion ($4.7 billion) of funded notes, was reportedly 1.8 times over subscribed and is expected to price at 16 basis points over Euribor for the 3 billion ($3.5 billion), 6.12-year triple-A tranche.
"Given that sourcing bonds without moving the markets has been easy of late, the secondary market move feels like bored traders doing a little too much too soon, in our view," said analysts at Dresdner Kleinwort Wasserstein. They added that "despite the apparently healthy subscription level of SHIELD, the fact remains that it is just 0.85[times] subscribed at 16 basis points, although this does mean the deal should find support if it prices at 17 [basis points]."
But with over 30 deals due to price before year-end, with an estimated seven RMBS, 10 CMBS, four CLOs and 10 CDOs, analysts at Dresdner said they believed there is value to be found in much of the current primary pipeline. If secondary market bid levels stay robust, Dresdner analysts expect the most aggressively bidding lead managers and traders to look for switch opportunities into new issues.
Meanwhile, marketing was underway for Cornerstone TITAN 2005-2, a GBP399 million ($696 million) U.K. CMBS from Credit Suisse First Boston's conduit. Price talk for its two triple-A rated tranches, the senior 5.9-year tranche sized at GBP263.3 million ($459.9 million) was talked at the 26 basis point over Libor area, and the smaller GBP16.7 million ($29.14 million) subordinated 6.5-year tranche was talked at the 35 basis points area only. The pool comprised five loans on nine properties split into 97% office, 2% retail and 1% other - 66.7% of the pool is located in London and 91.6% in the South East. The loans had a weighted average of 73.3% LTV.
ABN began marketing a 295.9 million ($348.36 million) CMBS of healthcare properties from its Talisman conduit. Talisman III is backed by nine loans secured on 47 German retail and office properties. A total of 213 million ($250.72 million) of 4.5-year triple-A rated notes are offered in addition to six subordinated tranches rated from double-A to double-B.
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