The European ABS market "shot out of the blocks" in early January with significant spread tightening in both "on-" and "off-the-run" names and across senior and subordinate bond classes at the same time.
The late 2009 revival of primary issuance continues to hold pace with several new deals marketing in January.
This combination of improved investor confidence and a flood of debt issuance that matures in 2011 means that 2010 could be a good start time for issuers to tap the European ABS market, said analysts at Bishopsfield Capital Partners.
Dealogic data showed European banks have debt maturities of more than Ã¢Â‚Â¬600 billion ($838.9 billion) to meet in 2010 across their various funding sources.
"We have heard a consistent theme from major issuers that they are keen to keep all issuance channels open across senior debt, covered bonds and securitization to meet their funding plans in 2010," said Henderson Global Investors analysts.
Moody's Investors Service analysts said that they had seen "some signs" that the securitization markets were beginning to thaw.
Prices had recovered somewhat in the secondary market, and some issuers were able to launch bonds toward the end of last year.
Moody's said it expected to see a gradual reopening of the primary market in more stable asset classes.
Lloyds announced the first European RMBS deal in 2010 and said that it planned dollar, euro and sterling tranches. Paragon Group U.K. is also looking to get into the market. In January, the firm asked UBS to arrange a roadshow for investors where the firm can talk about updating its strategy for its mortgage program, according to market reports. The meetings are set for February but are not related to the marketing of a specific deal.
BMW's Bavarian Sky S.A. kick-started primary business for the European ABS market with its Ã¢Â‚Â¬800 million Compartment 2 notes. The transaction comprises Ã¢Â‚Â¬742 million of Class A notes, priced at 85 basis points over, and Ã¢Â‚Â¬58 million of Class B notes at 105 basis points.
Pricing to Tighten More
Investors polled in the latest JPMorganEuropean ABS Investor Confidence Index for 4Q09 expect distributed European ABS new issuance to be in the Ã¢Â‚Â¬10 to Ã¢Â‚Â¬100 billion range for 2010, with the average forecast in the Ã¢Â‚Â¬50 billion area.
Most investors polled called for spreads to tighten marginally and stabilize over the year. Only 8% expected marginal widening, and none forecast significant widening.
The better prime U.K. RMBS names have already seen pricing tighten inside of 100 basis points from the 135 basis points area pre-Christmas.
"We believe that this was heavily Street led, with a number of dealing desks marking their positions up and keen to add inventory to relatively flat year-end trading books," explained Henderson analysts. "The subordinate bond bid appears to be more end investor driven."
"We are cautiously optimistic for a further improvement in ABS spreads based on relative value analysis of other credit sectors as well as a bottoming out of underlying credit deterioration," said Mike Nawas, partner at Bishopsfield Capital.
However, Henderson analysts said that limited supply has enabled bank trading desks to heavily influence market tone and provides limited price transparency.
"We expect this to change in the coming months, and only then do we believe that we will be able to start to construct a clear picture as to the depth and breadth of investor appetite for European ABS," analysts said.
Uncertainty over the removal of government support in the bond markets also means that issues should prepare to move early in this year.
"Right now we have stable conditions for ABS, but this may well alter as markets start to wean off quantitative easing and other central banks' support programs," said Steve Curry, partner at Bishopsfield Capital.
Downgrades Still in the Cards
While the stakes are slowly looking better on the primary front, Moody's analysts warned in a report published last month that many existing deals are likely to see further downgrades as the weak economy and banks' efforts to curb lending take their toll.
Moody's said it downgraded 458 tranches of RMBS deals last year, up from 246 the year before. More than two-thirds were in nonconforming, or subprime, issues from Spain and the U.K., where property markets have been hit badly.
A further 406 tranches are on review for possible downgrade.
Last year, 7.6% of 'AAA'-rated tranches were downgraded, up from 4% in 2008, but analysts noted that no securities originally rated 'AAA' had been downgraded below investment grade.
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