The primary pipeline in Europe is slowly gathering momentum, but the main story remains secondary trading. With only a handful of deals visible on the primary so far, market sources say trades continue to pull in.

"The beginning of the year is what it is," said one trader at BNP Paribas. "The market is slowly coming up to speed with 12 deals that are supposed to be marketing on the primary that should bring in a total of approximately 15.7 billion ($18.8 billion), but some of that is smoke and mirrors or issues that may have been left over from last year."

Price guidance out for Northern Rock

Price guidance came out for Northern Rock's Granite 2006-1, which its triple-B tranche talked 10 basis point wider than current market levels, according to sources. The triple-A guidance was talked at Euribor plus seven to eight basis points for the euro piece, 10 to 11 basis points over Libor for the dollar tranche and 12 to 13 basis points for the sterling tranche. That is in line with December's Gracechurch Mortgage Funding.

However, the triple-B rated notes are talked almost 18 basis points wider than Gracechurch's notes, which priced at 47 basis points over Libor. Market sources noted that the Gracechurch deal benefited from a static pool and increasing subordination from note amortization. "The rest of the price talk is actually somewhat less generous than usual, being flat to just 1bp wide of secondary," said a source on the Dresdner Kleinwort Wasserstein trading desk. "However, as Granite is also renowned for tightening price guidance more than average, perhaps this situation will be avoided this time round, although we would expect some revision for [triple-Bs], or further news flow explaining the wide guidance."

Toys R Us plays CMBS

Marketing is underway for Vanwall Finance, a GBP356 million ($626.8 million) sale and leaseback CMBS for Toys R Us. The properties, which include 29 stores and a distribution center, were leased for 30 years to Toys R Us. A total of six tranches are offered, rated from triple-A to triple-B with corresponding LTVs of 34.5% to 70.4%. Toys R Us is currently rated Caa2/B-/CCC', a weak credit standing reflected in the relatively low LTVs of the bonds issued in the transaction.

ABN markets 2nd covered bond

ABN Amro is marketing its second covered bond from its 25 billion ($30 billion) Dutch program. A total of 2.5 billion ($3 billion) of notes are expected, with maturity determined by demand, bringing its total issuance from the program to 4.5 billion ($5.4 billion). The collateral pool consisted of 7.1 billion ($8.5 billion) of mortgages with a 92.1% weighted average-LTV.

"These primary deals haven't been enough to satiate appetite and spreads on U.K. prime for example continue to come in by .5 basis point to 1 basis point," said the BNP source. "Mezzanine is also coming in and we should continue to see tightening - it's a very good time for the market."

Secondary still offers discounts

Analysts said that the final deals of 2005 that struggled due to the oversupply in the market are now trading at discount to par. There has been a lot of activity on Italian state side - the SCCI deal offers good value and tightened by a basis point but there is still some value on the longer end.

Traders at DrKW noted one interesting recent development is the decline in demand for "high cash premium" pass through amortization product. Accounts and traders reluctance to take the inherent prepayment risk when there is an abundance of par-area product available has led to widening of spread differential between two equivalent bonds where one is trading at par and the other is trading at a significant cash premium. "With conservative assumptions and correct interpretation of CPR developments in a given deal, this could lead to relative value opportunities over the coming weeks for savvy investors," said traders at the bank.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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