The European Central Bank's announcement last week that it would hold off on any further rate hikes in the current market led market players to suspect that the Bank of England will follow suit. And while a slowdown on rate hikes is expected to improve consumer sentiment, some players believe the current market crisis could take more than two years to run its course.
On the European ABS front, September continues to be slow overall, and pricing spreads aren't likely to find their grounding for some time. In the middle of a crisis, Europe appears to be looking for some direction. Price declines at these levels, coupled with the drying up of secondary trading, will lead to a complete decoupling of prices from credit fundamentals. "European structured finance paper is currently trading at levels that have no precedent whatsoever, making for a compelling relative-value argument, considering that bonds remain mostly unimpaired, unlike pockets of the U.S. securitized market," Deutsche Bank analysts said.
A Quiet September
For the first half of 2007, and before the summer events, the funded volume of European securitization issues had reached 280 billion, nearly 70% higher than the volume issued during the same period in 2006, according to the European Securitization Forum (ESF). Typically, the primary deal calendar would have resumed by the first week of September, according to Societe Generale ABS traders in London. But without any immediate alleviation to the current market crisis, 2007 is looking likely to unravel quite differently than originally projected at the start of the year. Deutsche Bank analysts said they expect primary volume in the next four months to fall 70% to 80% below the same period last year.
The impact of the credit crunch on underlying asset origination for some banks - and particularly for securitization-dependent nonbanks - could stall any recovery in European primary structured finance volume, according to Deutsche Bank. "We believe that what deal flow there is in the coming months will be superior in profile to anything seen in recent memory," the analysts wrote. "This post-crisis natural de-risking of structured finance should see better quality collateral (reflecting better underlying asset selection) and stronger securitization templates (less levered, more tightly structured, etc.) with simpler liability structures."
Outside of subprime-related skittishness, this month's slow start can be tied to the almost $140 billion of commercial paper in Europe that comes up for refinancing, with around $60 billion of this paper owed by conduits. Some SIVs have already cited problems finding funding, which has forced these vehicles to unwind some of their positions. Some players believe that if the market can avoid a large unwind in coming weeks, that would likely set a positive tone for spreads. "It really does feel like we are right on the cusp of something - assets are cheap, but the question remains: are they going to get a whole lot cheaper, or are they about to return big?" Dresdner Kleinwort trading analysts said.
Some ABS traders said they still have clients who are looking for ABS opportunities.
Investors last week saw more opportunity on U.K. and Dutch spreads, with pricing in the mid to low 40s. "We are not advising our clients to come to market," said a senior ABS trader, "but people are looking for good quality on the cheap, and think they can get it now."
At least one Spanish transaction began marketing last week. Santander Consumer EFC is selling its 1.2 billion Santander Consumer Spain 2007-02, a secuitization of Spanish consumer loans. According to market sources, the deal is the first Spanish consumer ABS to include borrowings other than auto loans. The capital structure includes five tranches rated by Moody's Investors Service from Aaa' down to Caa2.' And sources continue to speculate that a new Granite deal will be announced soon, which will likely be a short-dated deal.
However, Royal Bank of Scotland traders said they suspected that some of the deals coming to market will take the form of balance-sheet trades. "At this juncture of the cycle, we single out the U.K. nonconforming mortgage market as being the most at risk of seeing an acceleration in credit impairments and potential lender failures going forward," Deutsche Bank analysts said.
GMAC-RFC reported that its reserve took a hit in the RMAC 2006-NS3 transaction. "While the hit was a minor GBP127,606 (1.6%), the reserve draw was emblematic of reserve squeezes that may begin percolating in transactions where so-called fixed-rate loans and rate-based loans were largely unhedged," Royal Bank of Scotland said. "Though we expect that many of the hits will be temporary and minor, the headlines generated make for poor reading in this market."
U.K. subprime lender Victoria Mortgages announced on Sept.10 that it had gone into administration and is no longer funding any new business, saying the disruption in the capital markets has weighed heavily on its funding levels. The lender is owned by U.S. private equity firm Venturion Capital. The FSA released a statement saying that the lender represented 0.064% of the overall U.K. mortgage market and that 381 customers who had current mortgage offers may be affected. GMAC-RFC has offered to review potential completions in the next three days with a view to providing possible loans to these borrowers. According Deutsche Bank analysts, mortgages originated by the lender are present only in RLOC 07-1, where they account for less than 4% of the pool, and in EMAST 07-1V, where they constitute 100% of the pool.
"Their problem was a liquidity problem - not rising defaults as was/is the case with its U.S. counterparts," explained Dresdner analysts. In addition, mortgage lenders Northern Rock and Bradford & Bingley are not commenting on their current situation. Both forwarded inquiries to Finsbury Ltd. public relations, which, in turn, declined to respond.
Not So Quiet
A clear winner in the unusual September slowdown appears to be the copious law firms scattered across London. Firms such as Cadwalader, Wickersham & Taft and Simmons & Simmons are said to be rushing around putting together deals. "The work is still there for us," said one lawyer. "With ABCP people simply not rolling over and banks dipping into their own reserves, we are generally swamped with restructuring and refunding deals."
Traditional insurance companies are also anticipating a rise in business in the fourth quarter. Both AXA and PMI Europe have made new appointments in an effort to boost their grip on ABS trading in Europe. Furthermore, there is a general feeling that insurance tends to thrive in bearish markets and dip in bullish ones. "In the heat of the moment - say, a year ago - there was a dash for cash," said a senior executive at an insurance company. "And if investment banks would have taken the time to get insurance one year ago, then the pain would have been spread to [the insurance sector] as well, instead of having these concentrated problems in CDOs and SIVs."
"But it never quite works out like that," he added.
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