Greece's RMBS sector would be one of the victims of the country's exit from the eurozone, which appears increasingly likely in the run-up to June 17 elections between parties supporting and opposing austerity measures, a condition of the country's bailout.
JPMorgan Securities' "house view" is that the chance of a Greek exit has increased to roughly 50%, although the probability and timing are hard to predict, and the weeks before the election remain largely uncertain.
The firm believes that in any event, there will probably be considerable negotiation between the Greek government and the rest of the countries in the region, so an eventual exit is not at all a foregone conclusion.
Exit's Likely RMBS Impact
For Greek securitizations, this possible change in currency from the euro could result in an increase in RMBS defaults.
RMBS deals from the country are typically structured under English law, which does not allow for the automatic redenomination of the bonds.
Greek RMBS bonds can initially "benefit incrementally from subordination protection compared to other liabilities that risk being redenominated directly," Royal Bank of Scotland (RBS) analysts explained in a report published on May 23.
Under English law, these bonds can be legally redenominated only under a multilateral agreement, without which the bonds would likely default in "most cases," the RBS report said. Because of the serious consequences, it is likely that there will be a multilateral agreement supported by legislation in all of the affected countries involving the European Commission, the report added.
At the time of the May 23 report, RBS analysts said that Greek legacy senior MBS were still trading relatively "rich" in the context of their now deeply distressed status.
They explained that "the richness of senior structured finance may be justified from a rating perspective because senior bonds still typically benefit from a six-notch uplift to the 'CCC'-rated sovereign." Greek senior ABS/RMBS are typically rated 'BB+'/'B2'/'B-' by Standard & Poor's, Moody's Investors Service and Fitch Ratings, respectively.
How a Greek exit plays out in the broader securitization market is also not clear. The more credit-sensitive parts of the markets continue to perform weakly."Eurozone tensions are likely to remain a drag on risk asset pricing, to potentially include asset-backed bonds in our view," RBS analysts wrote, adding that senior vanilla securitized credit is trading only moderately weaker as talk that Greece was considering a eurozone exit mounted. Benchmark senior Northern Rock Granite bonds, for example, were trading a half point weaker, and 'BBB'-rated bonds were nearly three points lower over the week of May 21, they noted.
In terms of the European primary market, deals continued to price. For the week of May 21, Santander U.K. priced its FOSSE deal, a €3.2 billion ($3.99 billion) multi-currency print that saw the euro-denominated three-year paper clearing at 110 basis points over Libor, which is a post-crisis record tight.
Also in May, Allied Irish Bank printed a £316 million ($486.6 million) prime RMBS that priced at a spread of 250 basis points over. The deal, called Tenterden, marked the bank's return to the capital markets since 2008. It is also the first non-government-guaranteed bonds to come from an Irish bank that have been placed successfully in the ABS primary market since 2008. The deal's success is especially notable given the increasing risk aversion that has dominated the ABS primary market for the past few years. "Investors have shown they are willing to invest in deals that deviate from the usual 'safe-haven' category if spreads are attractive enough," said Reto Bachmann, head of European ABS research at Barclays Capital.
In the U.S. non-agency space, near-term price action is also likely to be driven by these events in Europe, Bachmann stated. As a result, the firm remains cautious on weaker credits including subprime/negative amortization floaters. There is widespread concern among industry analysts that contagion fears could spark deposit runs in Southern Europe that would force the European Union to undertake new measures and further foster the uncertainty around the eurozone's fate.
RBS analysts noted in their May 23 report that if other vulnerable countries, such as Spain and Italy, are downgraded and their banks experience capital fleeing, leaving them unable to raise funds or capital, it might force these countries to also consider eurozone exits. "The consequences of a eurozone exit are generically applicable to any country, although Greece, Portugal and Ireland remain the most likely candidates, in that order, in our view," the analysts said.