The primary market in Europe is beginning to show signs of life after a months-long slump, but the new movement hasn't been enough to lift the mood entirely. Pundits say that the market is still far from being active and more important, attractive.
"Banks have an opportunity in the primary market again to make a real material return on investments," said an analyst at a European investment bank. "Their loan books are now fully funded, but the credit risk is still there for investors, who stand to only make money from excess spreads."
Last week saw the first deal to be fully publicly marketed E-MAC NL 2007-4, which came out of the Netherlands, with a weighted average cost of funding in the mid- to low 50 basis points - much higher than the 13 basis point cost of E-MAC NL 2006-3, said Societe Generale analysts, who added that the primary pipeline also includes "many CDO deals linked to spread arbitrage opportunities, which have arisen from the disrupted markets."
However, analysts at Deutsche Bank said that the primary market was still relatively held in "gridlock," and continued its praise for movement in the secondary market where cheaper prices "have attracted some real money and high yield investors," helping to offset, "the vacuum in primary market demand created by the loss of the leveraged investment vehicle constituency."
Deutsche Bank is rumored to have a new 2.1 billion (nearly $2.99 billion) pan-European CMBS deal, Deco 17, expected to come to market soon. The capital structure on Deco 17 is expected to comprise two senior tranches, according to the Royal Bank of Scotland, one of which will be wrapped, and also hold three subordinated classes of notes. "The target portfolio consists of 14 loans backed by 6,032 properties with 68% LTV, property concentration in multi-family (63.8%) and retail (16.4%) and geographical concentration in Germany (97.7%)," said analysts at the bank.
Alliance & Leicester has also launched Eurosail Prime-UK 2007-A, the GBP225 million deal made of equivalent prime RMBS, comprising 53.4% buy-to-let and 45.7% self-certified loans. "Given that the transaction is billed as prime collateral, the deal has high credit enhancement, 18.7% on the triple-A level with a reserve fund of 2.1%," said analysts at the Royal Bank of Scotland about the deal. Pricing is expected this week.
The M-LEC fund is also expected to provide some relief, according to Societe Generale, as the liquidity is expected to allow spreads to tighten as secondary demand continues to improve. "We therefore believe this is a major step in bringing stability to the market," said analysts at the bank, "although we still think new pockets of demand are required to restore the primary market."
A market observer based in France said that the European primary market is still far from exciting, as there is a general feeling that "everyone is sitting it out of the primary market until 2008." Take as an example that the director of one such firm, which operates out of London, said he had a local group of hedge fund investors with GBP500 million ($1.04 billion) for investments. Last year, his company would have suggested U.K. prime RMBS, but now they are pushing to arrange deals in Nigeria, South Africa and the Middle East.
Barclays Capital reported that over 44 billion of European ABS bonds have been printed and retained by issuers since July. The bulk of the retained issuance has come from the Netherlands in the RMBS sector, but Spain has seen substantial retained issuance as well.
"To date in October, the retained issuance is roughly in line with the issuance sold to investors in October 2006 up to this date," said Barclays analysts. "Issuers of retained tranches might in the future decide to place these bonds with investors. Therefore, we believe that the 44 billion of retained notes could provide a source of possible future supply in the European ABS market. If this issuance is ultimately placed with investors, we will include it in our volume issuance. However, this placement has proven hard to confirm so far."
Law firms in London said that most of the activity they are seeing is, in fact, moving into emerging markets and equity derivative sectors. The bulk of the work is in completing administrative work left unfinished from the busy first two quarters of 2007 - a task normally reserved for December - and in restructuring current transactions on the capital market side.
"We're not twiddling our thumbs," said one lawyer. "As for the primary market, people are going to continue to wait and watch how the bank's deals get on," he added. "Basically, it's a case of waiting for someone else to go first."
Not the REIT time
REIT stocks in Europe will continue to perform below expectations for the remainder of 2007, according to the latest Quarterly Global Property & REIT report from Standard & Poor's Index Services.
The S&P/Citigroup World REIT Index showed a gain of 1.9% for this quarter and only 0.8% for the year to date. While Asian REITs are the best performing, showing the best returns from the healthcare and industrial sectors, European REITS are falling flat.
"REITs in the U.K. and Germany were launched with a lot of fanfare early this year, but have fared poorly during the recent market turmoil," said Alka Banerjee, vice president of Standard & Poor's Index Services. "It remains to be seen if REITs in Europe will pick up favor in the years to come. Frequently, countries have to go through several passes of REIT legislation until they arrive at a universally satisfactory solution, and both the U.S. and Australia are witnesses to this process."
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