European structured finance products continue to absorb elevated credit risks very well from a performance standpoint, according to Unicredit analysts.
"Structured finance in Europe has passed its first reality stress test, revealing weaknesses with respect to liquidity and transparency but proving overall robust from a fundamental perspective," Unicredit analysts said. "Overall defaults of structured finance products are still marginal in Europe. Losses in European exposures were related mainly to mark-to-market losses, a trend that has been reverted now, with increasing stabilization even in asset classes like U.K. nonconforming or CMBS."
Back in 2008, losses related to MBS, ABS, CDOs, SIVs and ABCP comprised over 50% of the total writedowns at European financial institutions, according to Unicredit.
However, from 3Q07, total writedowns at European banks have reached €674.24 billion. Of this, losses securitization-related (including monoline-related writedowns, SIVs, CDOs, CLOs, etc.) account for roughly €270 billion overall at European financials.
Unicredit analysts said that subprime-related exposure and CLO exposure is recovering even in the U.S.
U.S. option-adjusted rate mortgages are now trading up to above 60 cents from 33 cents a dollar. Leveraged loan CLOs by Lehman Brothers have generated annualized returns above 50% following secondary market price recovery, analysts said.
"Losses related to securitization products are no longer playing a significant role and the systemic writedown of structured finance products is over," analysts said. "Since last year, writedowns are no longer related to securitization but rather to credit costs, loan charge-offs and increasing provisions in other products. This is clearly supportive news for the securitization sector and it's still prevailing toxic stigma due to the subprime fallout. "