Senior tranches of vanilla ABS and RMBS deals in Europe should continue to benefit from the flight-to-quality mentality that has recently held sway in the continent, analysts from the Royal Bank of Scotland said Tuesday in an asset-backed strategy report that provides an outlook for 2012.

A recurring theme in the report is the tight relationship between the European banking system and the securitization market. "The funding/liquidity stance, rating direction, and deleveraging agendas of banks will remain powerful forces shaping the outlook of structured finance in 2012 and beyond," the RBS analysts said.

That cross-contagion will keep undermining less traditional ABS and subordinated tranches more than mainstream senior ABS and RMBS.

While a major macro force, bank deleveraging this year is unlikely to translate into massive disposals of legacy ABS. Banks will hold onto this deals thanks to central bank funding facilities and egregious gaps between market and book values in many ABS classes, according to the report.

The analysts said that overall technicals should remain supportive as run offs stay ahead of primary issuance. "All else being equal we see better 'pull-to-par' effects coming to bear in 2013/14," they added.

Under the pressure of high unemployment and projected negative growth, defaults among European borrowers should rise in the coming year. But the RBS report said their credit deterioration should remain orderly due to low interest rates.


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