Investors looking for some relief to the tightening bias that has taken hold on European pricing found a bit of comfort in the slight widening seen on secondary spreads seen last week, as market sources reported that bids on triple-A paper trading as much as three basis points wider. On the primary front, triple-A RMBS spreads shifted outside January levels by up to two basis points.
Market analysts attribute the recent movement to corporate bond market spread volatility mixed with a growing issuance calendar - over 10 billion (US$13 billion) is actively marketing in the primary market. Year-over-year volume for 2005 is at 70.7 million ($91.3 million) and, for the first time this year, on par with levels recorded last year.
Deals coming to market have generally priced at the wider end of talk, with a three to four basis point concession to similar triple-A trades printed before the General Motors earnings restatement. "Rumors abound of capital structure downsizing in order to clear even at these wider levels," said analysts at Deutsche Bank Securities. "With a thick deal pipeline ahead, it now looks pretty clear to us that the pricing tights seen among most (if not all) new issues pre-GM are unlikely to be revisited in the near future."
Last week the 1.6 billion Spanish RMBS issue, dubbed Bancaja 8 F.T.A., struggled to price its triple-A notes at the initial guidance levels and consequently saw the notes revised out during marketing. The triple-A piece was talked in the 10 basis point area over three-month Euribor and priced at 11 over. The single-A class was talked in the the low-to-mid 20 basis point area and priced at 23 basis points over. The lower rated tranches came in at the tighter end of price talk, with the triple-B piece pricing at 45 basis points over and the double-Bs pricing at 175 basis point over Euribor.
But even at the wider levels, trades are still not at historical pricing levels. At the subordinated levels pricing on RMBS deals remain at tight levels and triple-A CDOs continue to price at historical tights. "While we are pleased to see some spread returning to the market, we do not believe that this signals a return to their historical trading ranges," reported analysts at ABN AMRO. "The overriding liquidity driving spread compression has not disappeared, and, as such, nor has the broader pressure on spreads.
"Without any disappearance of the broader bid...we expect the market's bellwether spread of five-year triple-A RMBS to be capable of slipping to 12 but no further. Of course, this already appears to be a big if given the latest reports from our trading desk suggest that levels are already again starting to firm. So while the triple-A market might have moved, investors who blinked may have missed the chance for some additional spread."
Last week underwriters began marketing the 370 million Spanish RMBS Ayt Hipotecario III for Caja Granada and CrediFMO and priced the deal within guidance levels issued earlier last week. Guidance for the triple-A and triple-B notes was set at 13 and 60 to 70 basis points respectively, over Euribor, pricing at 13 and 65 basis points over. Although compared to the Bancaja 8 deal, the notes paid a premium at the triple-A and triple-B levels for a 0.5- and 1.3-year shorter weighted average life paper. Analysts at Dresdner Kleinwort Wasserstein said it was likely due to the relatively small size and probable lack of liquidity paired with the rating singular rating received only from Moody's Investors Service.
This week Northern Rock is expected to come to market with another transaction from its Granite master trust - its last deal issued in January totaled GBP4.5 billion ($8.5 billion) - adding more weight to the bulging supply pipeline. "Usually, we have seen large slugs of new-issue supply help the market find its feet, and spreads moved tighter. With most dealers long inventory already, we expect that this large amount of supply will pressure spreads wider," said analysts at the Royal Bank of Scotland.
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