NEW YORK - The average secondary spread on institutional cashflow loans is much more volatile in the U.S. than in Europe, with U.S. rates swinging by as much as 150 basis points in a quarter, compared with European spreads that have barely moved in the past eight years, according to panelists speaking at the Bear Stearns Global Credit Conference last week.
The main reason for the volatility in spreads in the U.S. versus the more even spread environment in Europe is that institutional investors constitute about 30% of the investor base in Europe, said Fabio Salvalaggio, of Harbourmaster Capital.
The average secondary spread of selected institutional flow loans in the European market was about 280 basis points over Libor, as of the first quarter, compared with 250 basis points over Libor in the U.S. market, according to Bear Stearns.
The U.S. spread was roughly 300 basis points over Libor in 1Q97, dipped to about 265 basis points in 2Q98, only to rise in 4Q01 to about 375 basis points over Libor, before falling to 275 basis points in 2Q02, rising steeply to about 425 basis points in the 1Q03, and then falling somewhat steadily to current levels. Contrarily, in Europe, the curve has remained a relatively straight line, slightly upward to reflect a rise, from a little over 250 basis points above Libor in 1Q97 to current levels.
"From what I can see, in the U.S., individuals are willing to take assets at a much lower spread," Salvalaggio said.
Solent Capital's Jonathan Laredo said another reason for the stagnant spread environment is the lack of a secondary market, and a general lack of liquidity. While U.S. issuers price to the market's appetite, European issuers first size leverage before pricing, he said. "The elbow room for asset buyers is much less," Laredo said.
Separately, ABS CDOs are experiencing tight spreads in the European market. "It's a reflection of too many investors. But non-conforming in the U.K. is an asset class where recent pricing on a deal had triple-B pricing at 60 basis points. I wouldn't say it was insane, but I'd say it's a pretty interesting view of the market," Laredo said. "And until there is a fallout, that is going to be the way it will go."
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