The Information Management Network/European Securitization Forum Global ABS Barcelona conference is now wrapped, the lights have been dimmed at the beachside nightclubs and the business cards swept off the floor. And while a few stuck around Spain for a quick mini-vacation, it was back to work for the rest.
European deal flow may have leveled out in August for the past three years, but rumors continue to circulate that such may not be the case this year. "I've been told there will be no vacation in August,'" said one covered bond director at ABN AMRO before he boarded his flight back to New York.
Indeed, traders at Bear Stearns said European ABS continues to rise, representing 20% of its non-U.S. business, up from 13 % from last year's fourth quarter. One source said this may be attributable simply to natural business growth, but he still doubted a third-quarter slowdown in European ABS and added that traders at the firm are expecting action in August.
Several smaller investment banks are also hunting for a spot in the European securitization game. So sensitive is the information that sources are demanding anonymity, not just for themselves but for their institutions. One such bank recently developed a synthetic ABS department, to run alongside its existing cash ABS department, in order to trade in higher volumes for the rest of 2007.
"We're getting involved," said one well-placed source at the bank who went to Barcelona for reconnaissance. "You are going to see a decline in cash-supply for the rest of 2007," he said, compared with the flurry of cash-based ABS deals inked in the run-up to Barcelona. "This is a signal that the [synthetic] market is going to pick up quickly in the rest of the year, especially with credit default swaps."
Hangover On The Horizon?
There are plausible scenarios for a slowdown in the third and fourth quarters of the ABS market in Europe. At the most basic level, consumer economies in Europe are showing signs of cooling off. British supermarket giant Tesco, traditionally a stellar earner, is predicting a dip in earnings, a factor that has some market analysts worried that U.K. residential mortgage issuance will also fall, as people begin to tighten their belts.
This may result in a knock-on effect, skeptics say, which may lead to a slowdown of the massive U.K. RMBS sector. However, lenders are shrugging off the comments as mere assumptions. The Tesco predictions are not expected to have a large impact on one's ability to pay the mortgage, according to Ravi Takhar, head of residential mortgages at Investec Bank.
"The increase in base rates will have a knock-on effect on the property market, but it will be limited," said Takhar, who spoke at a panel on European nonconforming RMBS in Barcelona. "There is strong demand for housing, but the supply is limited, and with high employment rates and continued immigration, I don't see an obvious slowdown for 2007."
Nonetheless, expectations for the Continent are not as bright, according to Marco Grimaldi, head of European securitization at Dresdner Kleinwort, who sat on an Italian ABS panel at the conference.
"The ABS and covered bond market in August will be slowing down, and the market in the second half of the year will be driven by the demand side," Grimaldi said. "For instance, Spain is perceived as somewhat of a risk due to concerns on the Spanish real estate market, and this has driven spreads up over the past month in spite of the fact that Spanish fundamentals are still quite strong. This perception, along with everything else that is happening in other ABS markets, may result in a relocation of investment portfolios."
Grimaldi added that investors are complaining about a lack of product diversity in Italian ABS. Indeed, investor Cristiano Rinaldi of Generali Asset Management said at the Italian ABS panel that the market feels that traditional Italian banks are doing very little to offer more options. To highlight Rinaldi's concern, Grimaldi proposes the example of the average borrower in the U.K., who can "walk into Bank A and choose from a number of different options on their mortgage," then "walk into Bank B and switch the mortgage, if they want."
"This enhances the liquidity and transparency of the market, in the interest of both borrowers and investors," he said. Grimaldi added that such borrower flexibility is unheard of in Italy, and recent incentives, such as the Bersani Decree, which eliminates some mortgage prepayment penalties, will do little to change this environment.
"In Italy, there are still lots of grey areas, small print and lack of transparency on product offerings," Grimaldi said. "This can create a market imbalance that may affect the growth of the mortgage market and of securitization in a negative way."
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