A heated debate on the potentially destabilizing impact of introducing a European prime RMBS index has been taking place behind closed doors, Henderson Global Investors analysts said.
They said that a core group of five investments banks Goldman Sachs, Morgan Stanley, Deutsche Bank, JPMorgan and Bank of America Merrill Lynch have been working to agree on the terms of a new ABS index referencing prime European RMBS transactions.
The index will comprise of 12 European RMBS names, mostly Master Trust issuers. It will be structured similarly to the ABX and will be offered in rated tranches of risk referencing the appropriate tranches of the reference obligations.
ERMBX tranche risk will be available in triple-A, double-A and triple-B ratings. The index will trade on a price basis and will use European pay-as-you-go technology.
Once the terms of the index have been finalized, it is expected that the dealer group will be expanded to 10 firms, which will make markets in the index.
The initial intention of the dealer group was to introduce the index in early October 2009, but there has been a strong backlash against the index from the issuer community. The opposition is mixed with indifference from many buyside investors.
The issuer community is concerned that the index will be used solely by dealers and hedge funds looking to short the market, pushing spreads wider again and frustrating their efforts to re-establish the new issue market, Henderson analysts explained.
They added that issuers have formed their own informal committee and have stated their concerns to the dealer group. Issuers have also made it clear that they will not look favorably on dealers involved in advocating the introduction of ERMBX in awarding new-issue mandates for the coming months.
Henderson analysts said that those in the dealer group that have less active cash ABS franchises than was previously the case still seem keen to push through with the new index. The dealer group has organized a meeting on Oct. 14 to vote on the timing of either the introduction or delay of the index.
We believe that ERMBX will ultimately be introduced but that it will be delayed until 2010, allowing a clear run for new issues and a further market tightening, analysts said. This is probably the correct result for a market which is attempting to take-off again and does not need any unnecessary volatility, which may knock it off target.