Merrill: Lower ECB Haircut Might Aid ABS

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A drop in the haircuts applied to securitizations used for collateral funding from the European Central Bank (ECB) is a positive for the sector, according to analysts at Bank of America Merrill Lynch.

In a report, they said that the lower haircuts puts asset-backed securities closer in line with covered bonds, thereby reducing the financing advantage the latter had enjoyed for some time.

“This represents a favorable development for ABS assets that were previously treated significantly harsher than other asset classes, especially for peripheral ABS,” the analysts said.

The ECB trimmed the haircut on ABS rated at least single-A to 10% from 16% previously. Also, under a temporary framework established in March, the haircut of ABS rated triple-B minus to triple-B plus is reduced from 26% (32% for CMBS) to 22%.

The analysts estimated that as of the 1Q13, about €338 billion in ABS (after valuation and haircut) was being used for ECB repo funding, out of a total €837 billion that was eligible. This implies that roughly half of eligible volume was repo’d.

The Merrill BofA analysts said that dropping six percentage points from the haircut on single-A deals translates into €25 billion more in ECB repo funding against the same collateral eligible before the change.

“In the context of the overall eligible ABS collateral, it may not be significant, but it may be considerable for banks with funding difficulties, as it should make collateral usage more efficient and overall cost of funds lower,” the analysts said.

Apart from easing up on the haircut, the ECB lowered ratings requirements for RMBS, auto and consumer ABS, lease ABS, SME-backed deals, and CMBS. For these asset classes, two single-A ratings now suffice whereas before two triple-As was mandatory.

This would make more peripheral ABS eligible, expanding the eligible pool of deals, excluding CMBS, by €25-to-€30 billion, with the bulk coming from SME deals issued in 2012 and so far this year.

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