As summer comes to a close and all of Europe has seemingly taken a holiday from the toughest months for the securitization market, it's likely that when players return they'll find that the European market is no closer to recovery.
Market analysts said that credit crisis's end and the structured finance market's recovery are still far away. It's unlikely, they said, that the market will see any primary activity over the remainder of the year.
With the recovery of the market slipping further away, it's likely that the market will have to brace for further negative events affecting ABS debt.
"Securitization-related credit losses will further increase going forward as from a liquidity point of view, the situation on the ABS market has still not improved," Unicredit analysts said. "Securitization financing remains very expensive, particularly considering that few lenders have fully re-priced front-end asset lending rates, with many banks shifting towards retail funding sources where possible."
Last but not least, they said, demand capacity for ABS product, central banks aside, is still very limited. The current market is characterized by an "impasse where legacy investors continue to de-lever but with fresh money yet to buy-into the asset class," analysts said.
Deutsche Bank analysts said that the buying opportunities in the primary securitization market will be very limited until at least 2009, when they said signs of recovery should become more visible.
For now, European primary deal flow will continue to be driven by retained securitizations, with U.K. and Spanish banks among the heaviest users of ABS for its eligibility for central bank liquidity.
"While there is no clear evidence whether the retained asset-backed bonds are actually posted at the central bank window or are stockpiled into a liquidity war chest, both constituencies have dominated the use of such internal financing, accounting for around 57% of all retained deal flow seen since August 2007," Deutsche Bank analysts said.
It's All Retained Deals
Last week, although the securitization market remained virtually closed, activity for retained issuance continued.
Balliol Financing plc, a £12.8 billion ($23.9 billion) U.K. RMBS for Bank of Scotland's specialist mortgage lender Birmingham Midshires, priced its seven-tranche transaction. The deal consisted of £12 billion triple-A rated Class A notes that priced at 12 basis points and £800 million unrated Class B notes that priced at 40 basis points. All notes were retained and said to be for the Bank of England's special liquidity scheme (SLS).
Arkle Master Issuer Plc Series 2008-2, a £10 billion prime U.K. RMBS for Lloyds TSB, also priced and was retained. The pool consists of 388,040 loans on owner-occupied residences originated by Cheltenham & Gloucester. The triple-A rated Class A notes priced at 12 basis points, the double-A rated Class B notes at 60 basis points, the single-A rated Class M tranches at 80 basis points and the triple-B rated Class C notes priced at 100 basis points.
"The lower the trading activity, the less transparent the market, the poorer the bids and the wider spreads, this is exactly what we are experiencing at the moment," Unicredit analysts said. "For selected âunwanted' asset classes we even doubt that liquidity will ever return, as in the case for U.K. nonconforming paper and Spanish high LTV RMBS as well as structured finance CDOs."
Liquidity on the secondary market is close to zero and public primary market origination is practically not taking place as deals are mainly retained. As a result, spreads have widened once again and a large number of bonds are being offered while bids are rare. Unicredit analysts said that further down the capital structure, the discounts are at their highest. But for those investors who are left behind, the chance for occasional buy opportunities remain.
For example, London-based real estate investment trust Liberty International purchased £111 million of European CMBS. The firm, which specializes in shopping malls across the U.K., bought paper issued by three deals in which Liberty itself is the borrower, and its shopping malls - the Lakeside in Thurrock, the MetroCentre in Gateshead, Harlequin in Watford and Braehead in Glasgow - serve as collateral. The move secured the firm a £13.2 million profit, Liberty officials said.
"Liquidation, workout processes, ring fencing and restructuring as well as costly unwinding is already taking place and seems the only solution for many market players, thus a kick-start of secondary market activity remains challenging," Unicredit analysts said.
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