A large portfolio sale of collateralized debt obligations (CDOs) reportedly planned by Royal Bank of Scotland is set to test market appetite for non-agency residential mortgage-backed securities (RMBS).

Sources said a list went out May 20 for the $8.7 billion sale resulting from the liquidation of five CDOs: PICAR 2009, series 1A through 5A. The paper is backed by private label RMBS and bids were scheduled for Tuesday, May 28.

Arranging the deal was another U.K. bank, Lloyds TSB, said a source familiar with the bid list. RBS is understood to be both the originator and seller.

GSEs Also Offload

The latest news of a disposal came just one week after Freddie Mac announced plans to sell $5 billion in RMBS this year and Fannie Mae announced plans to sell a $2.2 billion list of legacy commercial mortgage-backeds (CMBS).

One fixed income asset manager, who declined to be quoted by name, said that everyone in the market is focused on the RBS trade. “[They’re] holding their breath to see how it is digested,” he added.

The sale is expected to be fairly well absorbed. “We are a little cautious near term on prices because they have gone up so quickly but do not see this causing much longer term problem,” said a Bank of America Merrill Lynch analyst.

The spike in prices has been factored into the sales’ expectations. “The market is always ready for cheap bonds, but I’m not sure that is the case here,” said Walt Schmidt at FTN Financial in an e-mail.  “The px talk on many of the larger items is much higher than it was in March, so I’m not sure what the appetite will be.” 

More Sales from Europe?

A BofAML securitization report released May 17 said that lower volumes of bids wanted in competition (BWIC) has led investors to look at large portfolio sales out of Europe as the next potential opportunity to source bonds in big volumes.

BofAML calculated that foreign investors still hold $194 billion, or 21%, of the outstanding non-agency universe, according to figures reported by Inside Mortgage Finance.

“With valuations so firm, people see that now it’s a good time to sell,” said the fixed income asset manager.
Fannie Mae this week also released details on its sale. It will be the first widely distributed list to include multi-family bonds, according to a Deutsche Bank securitization report. 

There are 17 bonds in the list with an average balance of $129 million. Each CUSIP is being offered all or none.

Deutsche expects there will be limited impact on pricing in the broader secondary market. “The market has softened over the last week and the size and uniqueness of this list will put further pressure on spreads,” said analysts at the bank.  “However, the scope of the potential widening should be limited and short,” they added.

Spreads should shrink again provided that another huge portfolio sale does not materialize.

“After the uncertainty regarding execution passes and fears of another large list in the near future wane, the exercise (assuming it trades well) could form the basis for the next tightening cycle in related subsectors,” Deutsche analysts added.

Barclays Weighs In

Barclays analysts agreed, saying in May 24 report that the sales would not be enough to “trip up” the market, although they warned that if timing coincides with a bearish turn then spreads could go even wider.
But overall Barclays analysts said they remained “constructive” on private label RMBS, even in the face of rising volatility and impending supply. While the sector appeared to have lost the immunity to broader credit trends that it had previously enjoyed, the key fundamentals that have provided a buffer to volatility elsewhere remain in place.

 “Loss-adjusted yields are still higher than other comparable assets,” the analysts said. “Housing data remain strong, and mortgage credit fundamentals continue to stabilize and improve.”

Barclays analysts also pointed out that in addition to the sales from RBS and the GSEs, there are other portfolio holders in Europe that could come out of the woodwork if the sales yield attractive pricing. Among the candidates are the German Landesbanks.

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