The recent uptick in primary, non-retained issuance in Europe could be more than just a one-off event.
A new Dutch RMBS deal means that Europe has taken another important step toward revitalizing its securitization market.
Delta Lloyd is issuing the bonds as the yield on top-rated five-year notes backed by prime Dutch mortgages has shrunk to 145 basis points more than benchmark rates, the tightest spread since September 2008, JPMorgan Chase data showed. The gap was 425 basis points in January. A basis point is 0.01 percentage point.
The Delta Lloyd sale will include a €189 million ($285 million) portion of Class A1 notes with an average life of two years. The price talk for these triple-A rated notes is at 120 basis points over one-month Euribor, according to market reports. Talk on the €643.5 million tranche of A2 notes with a 4.9-year duration is in the 150 basis points over Euribor area.
Natixis, Rabobank Netherland and Royal Bank of Scotland Group are managing the deal, according to a statement released by the issuer.
"It's probably a stretch to extrapolate next year's market conditions from one deal, but even in the current disrupted ABS investor base, in Europe there may be some room for sporadic deals to be absorbed pretty easily," said Jean-David Cirotteau, senior ABS analyst at Societe Generale Corporate & Investment Banking.
The European securitization market, Cirotteau said, has started to see signs that real money funds are returning to the market. DWS Investments in Germany and Legal & General in the U.K., have reopened their accounts and, together with bank trading desks, are responsible for much of the recovery of buyside interest seen in recent deals that have emerged from the U.K.
U.K. Deal Flow
In September, HBOS launched its Permanent Master Issuer 2009-1 via Lloyds bank, which was named the sole arranger and bookrunner. Barclays Capital and JPMorgan, were joint bookrunners on the deal.
The books on Permanent 2009-1 were more than twice covered for both the A2 and A3 classes, suggesting that there was approximately ₤2 billion (3.3 billion) of demand from 56 investors from 16 countries globally, though the majority of interest came from Europe. The A1 slice of the deal and ₤ 1.25 billion of the A2 tranche were pre-sold to JPMorgan.
October delivered the Silverstone 2009-1 RMBS transaction from Nationwide - via joint lead managers Barclays Capital, Citi and JPMorgan. Sources familiar with the deal said that it was two to three times oversubscribed and that by the time the deal priced, the ₤300 million fixed-rate A3 class was upsized to ₤650 million.
The five-year floating-rate A2 class, which was sized at ₤1.6 billion, priced at the tight end of the three-month Libor plus a 145-basis-point to 150-basis-point guidance range. Of the class, ₤1 billion was preplaced to JPMorgan, which is expected to hold it to maturity and not on-sell to other parties.
A key factor behind this deal's success was the structuring, which implies a put option back to the issuer that contractually removes the extension risk and low prepayment rates.
"We are very pleased with the outcome, and we've begun to talk with U.S. investors who now see the structure and yield and see it as a great buy," a sell-side source said. "We expect to see more issuance that is structured similarly going forward."
ECB Phasing Out Program?
A total of seven new deals closed last week, for a total of €15.1 billion. All of them were retained, and six out of the seven were rated by only one rating agency. This will no longer be possible after March 2010 when the European Central Bank (ECB) will require a minimum of two ratings.
The ECB said at the end of November that it plans to tighten the standards for which it accepts certain ABS as collateral for its refinancing tenders. Securitization structures issued after March 1, 2010 will need ratings from two separate agencies to be eligible, and the ECB said it will use the lower of the two ratings to determine the respective bonds' eligibility.
Following on the heels of the ECB's new rules for ABS collateral eligibility, executive board member Jose Manuel Gonzalez-Paramo spoke of the need for issuers to move away from the retain-and-repo model and to reengage investors in the ABS market.
He said that improved transparency and timeliness in investor reporting are seen as key to this, and proposed the introduction of loan level data requirements for ABS and more standardized reporting.
"We suspect his caveat that for some asset classes 'pooled or summary loan-level information may suffice' would probably come to apply for many granular consumer asset securitizations, but the thrust of any such initiative is welcome," Deutsche Bank analysts said. "For many deals, a huge improvement in the quality of investor reporting could be achieved even while falling well short of providing loan-level data."
Meanwhile, Cirotteau said that the market could be fairly big next year, based on the volume of potential assets to be securitized. However, the question remains as to what the appetite and depth of the investor base will be.
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