The significant June primary deal flow and the burgeoning July pipeline have revived talks of another record-breaking year for European securitization volume. But how these volumes will impact spreads in the run-up to the summer break is not clear and industry players are questioning whether the massive volume in the primary market will have a blanket effect on spreads.
The biggest surprise has been the sheer number and amount of deals done so far this year. Reported figures from Barclays Capital show that issuance is up 7% compared to the first half of 2005 for ABS as a whole, with CMBS up 30% for that same period. According to figures from Commerzbank, the U.K. continues to drive European year-to-date issuance, matching that of the country's total issuance in 2005. U.K. RMBS is slightly up year-over-year at 64% of total U.K. volume. Multi-jurisdictional issuance has seen the greatest increase in the first half of 2006, 82% of growth in this segment of the market has been CLO driven.
Spain, the Netherlands and Germany remain more or less in line with figures recorded during the first half of last year. Italy's volumes have declined by 24% due to a decrease in public sector issuance. Ireland, which had been absent from the ABS market since 2003, has made an aggressive reappearance in RMBS and CMBS. "Another interesting trend is the pickup in issuance (albeit small volumes) from the East, with deals out of the Czech Republic, Bulgaria, Kazakhstan and Russia," said Commerzbank analysts. "These have tended to be consumer-related (consumer loans and RMBS), rather than the future-flow transactions we have been used to out of Turkey."
"I think there is some scope for tightening at the triple-A level especially," said Fraser Malcolm, head of ABS syndicate and trading at Dresdner Kleinwort Wasserstein (DrKW). "As a product, triple-A ABS still looks [like] decent value relative to other markets including supra and covered bonds. The Basle II effect is also likely to continue this gradual tightening trend into next year. As for the subordinated tranches, I think scope for generic tightening by asset class is limited but we may see some deal specific historical tights being achieved for particularly attractive assets/pools."
A busy month on the
As always, RMBS has dominated the big transactions in both the balance sheet CLO space and in German multifamily housing. After a slow start to the year for CMBS that was followed by less-than-stellar months, the pickup in June has caused optimism in many quarters. This uptick in activity was marked by the coming to market of the largest CMBS deal from Germany, the multifamily transaction called GRAND (see story p. 20).
Contrary to industry players who believed earlier predictions had been too generous, the recent pipeline buildup could actually push volumes to exceed these initial estimates. "Initially, we forecasted issuance in the European CMBS market to grow between 45% to 50% for the full year, but following lower-than-expected 30% growth in the first half start, we revised our projection to 40%," said Hans Vrensen, a director responsible for CMBS research at Barclays. "However, it might turn out to have been an unnecessary move, in light of the current record pipeline of deals announced since the end of June."
The continuing flurry of pre-summer CMBS deal announcements has brought the pipeline volume to approximately 4.4 billion. The new deals announced last week included the GBP896 million Nemus U.K. synthetic balance sheet deal for HSBC. Nemus offers six tranches rated from triple-A to double-B, including GBP35.7 million of triple-A rated notes. The pool includes 23 loans on 272 properties split into 55.5% office, 10.7% mixed, 10.3% office/ retail, 8.7% retail and 14.8% other. The pool has a 56.4% weighted average LTV and 3.5 years seasoning.
Deutsche Bank began marketing on its 1.16 billion German/Swiss deal, DECO 9. The collateral is 90.8% German and 9.2% Swiss, comprised of 48.6% office, 33.4% retail and 7.7% multifamily. The 11 loans on over 500 properties had a 60.3% weighted average LTV and 90.9% occupancy rate. Pricing is scheduled for the week of July 24.
Also in the pipeline is a 380 million deal under Opera France One FCC from Eurohypo's CMBS conduit. The pool comprises one loan on three properties with 20 tenants located in the Paris suburbs. It offers only one tranche, rated triple-A, with a 6.6-year average life, and a 43.8% LTV. The top three tenants accounted for 69.1% of passing rent, comprising 32.0% Bouygues Telecom, 19.5% Credit Foncier France and 17.6% Cap Gemini.
Work is also underway for Talisman 4 Finance, a 738.9 million deal from ABN Amro's CMBS conduit. The provisional pool had a 77.5% LTV and was backed by 41.2% office, 33.8% retail, 6.2% residential, 5.8% logistic, 4.4% mixed and 8.6% other. Talisman offers seven tranches rated from triple-A to single-B, including 570 million of 5.4-year Class A notes.
And London and Regional offered its latest U.K. CMBS transaction, LoRDS II, sized at GBP256 million. The pool includes one loan on 27 properties split between 40% office, 24% London hotels, 19% leisure and 18% retail.
This new activity adds onto the 7.5 billion that was already marketing at the beginning of July, which includes the 5.4 billion German multifamily deal under Grand, 648 million pan-European conduit deal EuroProp and the GBP1,037 billion U.K. conduit deal Windmere VIII that priced last week. In total, the current pipeline has 14.5 billion of known 3Q06 deals, which compares to year-to-date issuance of 22.5 billion and 3Q05 issuance of 9.7billion - up by 50% versus full 3Q05 - and its not even two weeks into July.
"The timing of this flurry of deals is very interesting, with possibly a record eight European CMBS deals (approximately 10 billion plus) in the market at the same time," said Barclays' Vrensen. "Initially, we forecasted issuance in the European CMBS market to grow between 45% to 50% for the full year, but following a lower-than-expected 30% growth in the first half start, we revised our projection to 40%. However, it might turn out to have been an unnecessary move, in light of the current record pipeline of deals announced since the end of June."
Typically, such heavy activity is reserved for the year-end rally as issuers rush to get deals priced before investors close their books. Vrensen said that not even then has the market seen as much activity. Last December, seven CMBS deals priced between the twelfth and sixteenth of the month. Choosing mid-July could add pressure to spreads but Vrensen said that in the case of many CMBS structures, timing issuance is hard to manipulate because many transactions get caught up in the ratings process that can sometimes cause significant delays.
"But if you look at the deals slated to come to market they are all individual stories -the deals are all quite different, having collateral in different countries," Vrensen said. "Some are U.K., some are continental, some are multifamily, some purely commercial properties and one is also synthetic where the others are true-sale."
The structures faring best come from the German multifamily stock that offers investors the granularity they prefer. These deals tend to price at the tighter end of the market. But with one deal marketing and another deal slated to come to market this month, Vrensen wonders if investors will be around for this deluge. "When you have an unexpected spike in supply you might expect it to affect primary spreads, but the impact is unlikely to be uniform across all deals," he said.
"The CMBS market has continued to be very busy and dominated by bank conduit issuers," DrKw's Fraser added. "And it is slightly surprising that new issue CMBS levels have shown no sign of widening out in any material way - a testament to the acceptance of CMBS as a core holding in a European ABS portfolio these days."
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