It's hard to remain optimistic about European securitization activity coming back when virtually nothing is getting done in the primary market.
By this time of the year, European ABS should have already seen some sort of recovery, but instead new issuance has been the lowest seen to date. With the bad news seemingly never ending, it's hard to imagine the market will be taking off again.
Uncertainty remains the order of the day. Deutsche Bank analysts believe that the term ABS and financial markets will remain as good as closed until there's a clearer picture on the extent of the risk on banks' balance sheets. Euro activity resuming also depends on whether these financial institutions will eventually accept wider funding spreads or if central banks will become less generous with lines of credit.
The European Securitization Forum (ESF) last week said that concerns remain about critical issues such as whether bank investors will return to market to grow their portfolios or their conduits.
"The market is [also] worried that if the insurers lose their credit ratings or go bankrupt, then they will have to make up the value with holdings in their balance sheet," said Marco Pirondini, global chief investment officer of Pioneer Investments, during a recent market update Web conference call. "The losses could be even higher for some banks than the losses on the subprime market. However, we do not believe that this is a realistic scenario."
Last week the ESF published its European securitization forecast survey where it said that it expected a continuation of declining issuance for 2008 similar to 2Q07. Total issuance in 2008 is expected to fall 41% to 272 billion ($397 billion). Mortgage and real-estate-related asset classes are most vulnerable to an issuance slowdown. As such, RMBS, historically the largest asset class, is expected to record the steepest decline among the structured product asset classes. The sector is projected to drop 50% to 132 billion in 2008 from 262 billion in 2007. CDOs and CMBS, respectively the second and third largest asset classes, followed with anticipated drops of 35% and 36%.
Although the primary side hasn't been totally bereft of action this year, the deals that have come through either experience wider spreads or are retained. The reality for issuers is that if they want to get this market going, they are going to have to accept the wider loan margins.
Societe Generale analysts said that the chances of placing triple-A paper in the 20 basis point area is starting to go away, which means investors could witness some of the biggest investment opportunities in a very long time for some asset classes that just a year ago were plagued by tight pricing margins.
"I believe that we are going to see more losses and write-offs in the financial sector," Pioneer's Pirondini said. "However, I think that we will see the banks cleaning up their balance sheets over the next two or three years, and I believe that this is well priced into the market."
Even with these concessions, primary volumes might never reach the record highs to which the market had become accustomed. This means that Europe might have to stop measuring its success in terms of primary market volume growth, but instead focus on pricing and credit performance.
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