A spread squeeze was the theme for the week in European ABS, as more deals poured into the pipeline, seemingly unaffected by the U.S. holiday-shortened week.
With several deals still circulating, industry sources expect pricing to continue right through the December holidays. The question is: How long can current spread levels hold?
One of the defining trends for 2003 has been the unwavering stream of European RMBS, brimming over the E100 billion (US$118 billion) mark, almost doubling levels seen last year. Despite this onslaught of supply, spreads have managed to hold tight. "There is a lot of momentum behind us and, unless some major event were to occur, I don't think we'll see too much movement on either side," said one market source.
According to analysts at Deutsche Bank, the spread resiliency is a function of supply technicals. Although European issuance will easily surpass records set last year, the supply impact is misleading if isolated from other factors, such as the increase in paper picked up by the U.S. market.
Deutsche Bank estimated that publicly placed, non dollar-denominated issuance was actually 5% lower in 2003 than in 2002.
"What's more, bond redemptions in the European securitization market accelerated over 2003 with the market maturing in age, thus further reducing net supply," a Deutsche report said. Sizeable pay-downs included the earlier Italian treasury ABS, U.K. mortgage and credit card master trust issues, as well as bank balance sheet CLOs. "This truer picture of supply, weighed against the strengthening demand for structured credit in Europe, seems to us a plausible explanation of spread behavior
in 2003," the report said.
Meanwhile, at the start of last week, there was about E26.9 billion (US$31.7 billion) in new issues still to price, according to figures from Dresdner Kleinwort Wasserstein.
November volume will likely be record setting, with a number of large deals still in the pipeline for December.
Two Dutch deals priced earlier in the week, adding to the deluge of Dutch RMBS already seen in November, while another E2 billion (US$2.3 billion) of new Dutch RMBS paper entered the pipeline. New names circulating included the E1.52 billion (US$1.79 billion) Storm 2003 from Obvion N.V. The deal is being led through Rabbobank and NIB Capital Bank. Achmea Hypotheebank is also marketing a E1.25 billion deal (US$1.47 billion) through Credit Suisse First Boston (CSFB) and Deutsche Bank. It's the second issue from Hypotheebank this year.
Postbank, an ING Bank subsidiary, is marketing its E138 million (US$162 million) synthetic Dutch RMBS, Stitching Memphis 2003. CSFB and ING are lead managers. The deal is referenced to a E1.8 billion pool of prime residential mortgage loans.
At press time, there was talk that DSB Bank was showing investors Chapel 2003, to top last month's Monastery RMBS. Chapel, expected by the close of the week, should have added about E1 billion (US$1.18 billion) of Dutch consumer paper to the tally.
Out of Italy, a E747 million (US$881 million) RMBS transaction for Fineco Banca surfaced last week. The deal, called F-E Mortgages S.r.l, was expected to price by Friday. The bank has launched four other deals in the past, though F-E Mortgages is the first transaction issued under its master trust structure, and the first launched in Italy to date. Over the next four years, an aggregate of E3 billion (US$3.5 billion) may be issued under F-E Mortgages.
According to Dresdner, spreads for Dutch and Spanish secondary trading have generally held between 24 to 26 basis points, while U.K. and Italian residential deals have tightened by approximately four basis points since the start of the year.
The chances that spreads will come in any tighter at this stage is unlikely, said one market source, predicting that new offerings should see some widening, although not at typical year-end levels.
Analysts at Dresdner believe that ABS investors have probably filled their allocations or come close to it, allowing them more discretion in the market. The bank expects demand for larger liquid deals from repeat issuers to remain strong. "Deals that require longer marketing processes, [that are] closer to year-end, are likely to pay a premium," analysts said.
At the start of the year Deutsche Bank called mortgages the asset class of the year. Clearly their prediction was spot on. For next year, Deutsche Bank sees a shift toward more corporate related credits.