Since the financial crisis, the European market for residential mortgage backed securities has been dominated by U.K. and Dutch deals. Two recent transactions, one Irish and one Spanish, tested investor appetite for peripheral RMBS.

The results suggests there aren’t likely to be many more

Last week Union de Creditos Inmobiliarios priced the first investor-placed Spanish residential mortgage securitization since July 2007. The transaction, dubbed Prado I, features mortgages with low original loan-to-value ratios that were originated after the financial crisis. A €342 million ($372 million) tranche of four-year notes, rated ‘AA’ by Standard & Poor’s, pays 85 basis points over three-month Euribor. This tranche benefits from 27% credit enhancement provided by a €108 million ($117.7 million) junior tranche.

Also pricing last week was the second post-crisis Irish RMBS deal, Dilosk RMBS No. 1, sponsored by Dilosk Limited. The €196 million tranche of four-year notes, rated triple-A by DBRS and S&P, pay 80 basis points over there-month Euribor. The notes benefit from credit support of 22.5%.

Both levels are wide of comparable tranches of recent Dutch and UK RMBS. For example on May 19, a Dutch mortgage originator priced the senior, triple-A rated, 4.6-year tranche of DRMP1 at 27 basis points over Euribor. And on May 22, U.K. sponsor Virgin Money paid 45 basis points over Libor on the 5-year, triple-A rated notes issued from Gosforth Funding 2015-1.

The Spanish and Irish deals also look expensive relative to the cheaper funding available from the European Central Bank’s targeted long-term refinancing (TLTRO) operations, according to report published today by Barclays. 

“In our view, at 80-90 basis points, peripheral European banks will not be willing to issue substantial amounts of ABS considering how much cheaper TLTRO or covered bonds are as a funding source,” the report states. “We think the breakeven spread levels at which second- or third-tier peripheral banks could favor the sale of ABS over TLTRO are 35-50 basis points.”

Prado I is backed  by 3,761 residential mortgages with a weighted average seasoning of 54.16 months and a weighted average original LTV of 57.14%. Credit enhancement for the class A notes is sufficient to mitigate their exposure to credit and cash flow risks at the 'AAA' rating level.  However S&P caps the rating single-jurisdiction securitizations at four notches above the sovereign foreign currency rating, which for Spain is ‘BBB.’

Dilosk 1 is backed by 1,939 loans that are on a weighted-average basis 5.4 years seasoned, with 59% of the portfolio originated from 2010 onwards. The weighted-average loan-to-value (WALTV) of the portfolio is 49.61%. Deutsche Bank is the lead manager on the deal.  

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