Increased supply, both in the primary and secondary markets via BWICs, and weaker market sentiment have pushed spreads wider.
On the supply side, more European banks are looking to unwind their legacy position and clear up balance sheets in the run up to Basel III. This trend can lead to tens of billions of dollars worth of assets flooding the capital markets. Some of the legacy paper are risky residential RMBS.
Barclays Capital last month announced the unwind of its Protium vehicle, which was originally set up in 2009 to hold mainly U.S. structured credit assets. This move comes on the heels of a very similar action take by Citi recently, which readied the sale of some $13 billion of credit assets by shifting these back into trading books, according to Royal Bank of Scotland analysts.
As reports of more of Europe's 'bad-bank' constituency emerge, RBS analysts said that "any sales currently are likely to make most obvious sense only in the case of liquid, senior ABS but potentially also in the case of low or unrated downgraded bonds, for which exit economics will not be limited to pricing alone given the benefit of saving on otherwise punitive capital that must be held against such risks under the new Basel regime."
A wide-scale sell-down of legacy assets could impact market clearing prices, but RBS analysts said that risk will be outweighed in the longer term by the liquidity discovery that comes with such flows. A recent Wall Street Journal report said that persistent talk about more paper hitting the market comes with reports of increased appetite from hedge funds and private equity shops cashing in on the opportunity created by the flood of assets, which are now priced at a discount.
A pick-up in new securitization volume at the end of May can additionally pressure pricing on the secondary side.
Supply-wise, the primary market saw a new deal from Spain via Volkswagen Driver Spain 1. The pipeline also includes NIBC's Dutch MBS 16, Cassa di Risparmio di Cento's Guercino, Credit Suisse's ALBA 2011-1 and Yorkshire Building Society's new Brass 1 deal. According to market traders, on the BWIC front, the market saw a decent-sized Spanish and an Irish lists up for bid simultaneously.
Granite triple-Bs and ABS mezzanine bonds from peripheral jurisdictions were most affected, with the former trading at half a point. At press time, according to market trading reports, Granite triple-As were trading down at 96.25, which is 50¢ off recent tights, with even bigger price movements in mezzanine where triple-Bs were down two points in the 65.5-basis-point area.
Similar to the U.S., it isn't just a supply deluge that is pressuring European spreads. To be sure, market players have said that the tone in Europe is turning toward risk aversion as concerns over the Continent's sovereign debt problems once again take center stage. Fitch Ratings cut Greece's rating three notches last month to single-B plus while Standard & Poor's said that Italy's rating is at risk. Political tensions also continue to grow in Spain and Germany, where ruling parties did poorly in the elections.
"Renewed European sovereign concerns weighed on broad risk appetite and spilt over into ABS yesterday," Deutsche Bank analysts said in a recent report. "In general and in contrast to financial debt pricing, over the past year European ABS has proved relatively resilient to the European sovereign crisis. It remains to be seen what impact if any will be had on the senior new issue market where the pipeline from core jurisdictions is building."
Granite triple-Bs and ABS mezzanine bonds from peripheral jurisdictions were most affected, with the former trading at half a point. At press time, according to market trading reports, Granite triple-As were trading down at 96.25, which is 50¢ off recent tights, with even bigger price movements in mezzanine where triple-Bs were down two points in the 65.5-basis-point area.
