U.S. market disruptions have put a damper on the good times Europe has been enjoying until now. While the European market is generally optimistic, the pressure on spreads at the mezzanine level continues to remind players of the world beyond.
The U.S. ABX and single-name credit default swap market continued to feel the pinch from further deterioration in subprime collateral performance and the continued selloff there, which remained unabated over the past week.
According to Deutsche Bank Securities, triple-B and triple-B-minus securities traded at a loss of three basis points and eight basis points. U.K. nonconforming triple-B RMBS CDS spreads are trading 60 to 100 basis points wider to levels seen earlier this year.
"Spreads in the nascent U.K. non-conforming RMBS CDS market appeared to have held firm, though we would note that price action was barely observable given the extremely light flows in the past week," reported Deutsche Bank analysts. "While credit fundamentals theoretically justify the resiliency of U.K. non-conforming CDS (arrears and default performance among RMBS portfolios remain mostly stable), we cannot at this stage preclude further contagion-related volatility going forward."
But as analysts at Societe Generale pointed out last week, this financial volatility contrasts with continued evidence of a relatively benign corporate credit environment. According to Moody's Investors Service, the global speculative-grade default rate fell to 1.4% from 1.6% a month earlier. "The credit performance of European securitized portfolios also remains largely stable, notwithstanding the recent barrage of negative headlines related to the commercial property, leveraged loan and selected residential mortgage sectors," SG analysts said.
However, the relatively healthy performance hasn't meant the market is without its problems. Recently, Standard & Poor's downgraded the Italease deals 2005-1 and 2006-1, following the company's announcement that its mark-to-market on its counterparty risk related to over-the-counter derivative contracts made with its clients had ballooned to 400 million ($537 million) at the end of May, from 225 million at year-end 2006.
The ratings of these Italease deals were also lowered earlier this month by Moody's and Fitch Ratings to Baa1' and BBB+', respectively. As a result, the spreads on Banca Italease's securitization transactions have widened significantly. And a number of securitizations related to the central region of Lazio, which includes the city of Rome, were downgraded following Moody's downgrade of the region to A2' from A1'.
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