The issue of whether Greece will or will not default has yet to be put to rest. However, the securitization market proved its resiliency in the face of uncertainty as it opened up primary flow last month with a small bang.
Benchmark issuer Volkswagen Leasing came to market with VCL 14, pricing shorter than two-year weighted average life. The deal had triple-A and single-A bonds that cleared at 65 basis points and 150 basis points over Libor, respectively.
This is notably just two basis points and five basis points back from the last auto primary transactions seen in the European auto sector in March 2011.
The transaction's Class A was originally slated to be worth €693.7 million ($944 million) and the Class B €22.5 million, with an initial pricing guidance at mid-high 60s for Class A and 150-160 basis points for Class B.
By the time the bonds priced, the Class As were 1.35x oversubscribed and the class Bs were 2.40x oversubscribed, according to Barclays Capital analysts. In the end, the deal was upsized to €790 million for the Class As and €25.6 million for the Class Bs.
"The placement of the mezzanine notes in this market is a distinct positive, and is one of only a handful of sub-senior notes that have been publically placed this year," Barclays analysts said.
Barclays also tapped the market via a €1.1 billion three-year series from its Gracechurch Card Program Funding PLC, which priced at 75 basis points over one-month Libor, which is wider than the post-crisis record tight of 55 basis points over three-month Libor.
The assets backing the notes were receivables arising under designated MasterCard and Visa revolving credit card accounts originated or acquired in the U.K. by Barclaycard, a business unit of Barclays.
According to Royal Bank of Scotland (RBS) analysts, ABS clearing spreads have moved significantly tighter to comparable unsecured levels. But what has been even more surprising is the marketing route these last deals have taken - via the traditional public market rather than through private placement transactions.
However, even with the recent public deals, private placements are probably still going to remain a fairly common feature of the European ABS primary market over the rest of 2011. This is a result of the ongoing concerns over Greece and other European countries.
"Given the economic concerns over the past few months, it is unsurprising that the first transaction to come to market after the summer, Holmes 2011-3,came via the A5 and A6 notes pre-placed and a short marketing period for the remainder, suggesting that some investors may already have been lined up," Barclays analysts said. "The risk of coming to market without some lead orders may well be too risky for some issuers, as a failed deal may do more harm than good for their future issuance expectations."
The vanilla sectors such as cards and autos continue to look dislocated versus U.S. equivalents (which clear typically at 15 basis points and 25 basis points over Libor, respectively), according to RBS analysts.
The U.S. ABS market has witnessed a resurgence in primary flows recently, with volumes up 11% year-over-year to $75 billion year-to-date, bringing issuance in line with European primary ABS year-to-date. "Unlike Europe, senior vanilla U.S. ABS spreads remain well inside domestic credit comparables, with the likes of short-dated credit card and prime auto triple-A floaters trading in the 10-basis-points to 25-basis-points context," RBS analysts said. "The extraordinary volatility in European financials recently looks to have forced a decoupling of RMBS benchmarks from bank credit, leaving RMBS spreads somewhat 'directionless' and sticky at pre-summer levels."
On the secondary front, Granite Euro triple-As were trading at 94.35 bid and the triple-Bs at 45.25 bid, Barclays analysts said.
"Primary spreads have cleared deep inside comparable secondary levels, with the richness of this new-issue premium arguably explained by the contemporary collateral and structures, also the better liquidity that comes with a fully sized print," RBS analysts noted in a report on market pricing.
Still, the secondary market has remained largely range-bound as investors retract from getting involved rather than selling up. The market is defined by a lack of activity and the general perception is that investors are waiting to ride out the current bout of volatility, Barclays analysts said.
"The placement of these deals bodes well for the market, though we still expect the remaining months of the year to be a struggle," they added. "Some deals may rely for the first time on the ABS East conference held in Miami in October. With U.S. investors playing a large part in issuance this year, and various issuers said to be attending in the U.S. this year, we may see a pick-up in issuance thereafter, though with credit market concerns continuing, it will be a tough market for any issuer."
