The European ABS Market – A Week in Review

29/08/08 - 04/09/08

Philippe Pagnotta, ABS Analyst - Markit
philippe.pagnotta@markit.com

The European ABS market continued to weaken during the past week even as governments and central banks took actions to temper the effects of the credit crisis.

Negative headlines and a lack of trading activity contributed to negative sentiment. Our weekly table of the market’s top five biggest movers was again populated only by deteriorators:

ABS Deteriorators

Short Name	Name	Isin	Spread (bp)	Change (bp)	Rating	Sector	Avg Life(yr)
CAM3 3 A EUR	Tda Cam 3 Fondo de Titul de Activos	ES0377990009	304	20	AAA	RMBS	3.6
GRANMAST06-4 2006-4 A7 EUR	Granite Master Issuer plc 2006 4	XS0275944766	331	17	AAA	PRMBS	3.1
CELTICRES9 9 A2 EUR	Celtic Residential Irish Mtg Secn No 9 Plc	XS0235753299	226	17	AAA	RMBS	3.6
TDA-CAM5 1 A EUR	TDA CAM 5 Fondo Titul Activos	ES0377992005	307	15	AAA	RMBS	4.7
MADR1 I A2 EUR	Madrid RMBS I Fondo Titul Activos	ES0359091016	304	3	AAA	RMBS	4.5

This trend was matched in the ABCDS market, where all sectors continued to widen. With the exception of the Dutch names, we continued to see a negative basis at the AAA level whilst at the BBB level, most securities exhibited a positive basis:

Deal Name	Series	Class	Currency	Isin	Synthetic Mid Spread (bps)	Markit Cash ABS Mid Spread (bps)	Basis (Synthetic - Cash)	Average Life (yr)	Markit Av Life (yr)	Duration
Holmes Master Issuer PLC 2007 1	2007-1	3A2	EUR	XS0292750253	133.50	155.88	-22.38	2.67	2.61	2.46
Perm Master Issuer plc 2007 1	2007-1	3A	EUR	XS0288090342	159.50	176.85	-17.35	3.24	3.24	2.75
Arkle Master Issuer Plc 2006 2	2006-2	3A2	EUR	XS0277508692	132.67	162.35	-29.68	2.47	2.46	2.23
Granite Master Issuer plc	2007-2	3A2	EUR	XS0298974840	299.29	322.36	-23.08	3.24	3.24	2.90
Arkle Master Issuer Plc 2006 1	2006-1	5A1	EUR	XS0273274869	142.07	163.30	-21.22	3.65	3.67	3.54
Delphinus 2006 I BV	2006-1	A	EUR	XS0256323972	114.43	98.13	16.30	3.07	3.07	2.82

Two deals were priced in the primary market, including a floating-rate issue from EMF. It is the second EMF-NL to be issued this year. The first one was issued in April with ELQ Portefeuille 1B.V. as originator. The most senior tranche priced 10 basis points wider at 100 basis points, mostly in line with the secondary market:

Deal	Country/Sector	Class	Av Rating	Spread (bp)	Amount (€ mn)
EMF-NL 2008-2	Dutch/RMBS	A1	AAA	100	182
		A2	AAA	100	62
		B	AA	100	15
		C	A	100	14
		C	BBB	100	11
		RES	-	-	-
BAA Funding Ltd	UK/PPP	A-1	A-	fix: 12.45%	381
		A-2	A-	fix: 9.20%	317
		A-3	A-	fix: 7.08%	254
		A-4	A-	fix: 6.45%	1,143
		A-5	A-	fix: 3.98%	1,000
		A-6	A-	fix: 5.85%	503
		A-7	A-	fix: 4.60%	750
		A-8	A-	fix: 4.60%	750
		A-9	A-	fix: 5.23%	952

The week’s biggest news came from the UK as Gordon Brown announced a £1.6 billion package to boost the slumping housing market. The different measures included in the plan, which will only be applied in England, include the following:

No stamp duty (1% property value) for buyers of homes priced below £175,000 from September 2008 till September 2009
Free five-year loans of up to 30% of a property’s value for first-time home buyers
Expansion of the powers of councils and housing associations to pay off the debt of homeowners in crisis situations
Decrease the period before income support for mortgage interest is paid to 13 weeks from 39 weeks

The British government appears to be following in the footsteps of the United States as the Bank of England’s changes to monetary policy alone have not been sufficiently effective. The question remains as to if the British government’s steps towards fighting the housing crisis will be sufficiently effective. For example, the stamp duty decision is applicable to houses priced below £175,000. That is below the UK average of £185,000 and well below the London average of £291,000 according to Halifax. The action was targeted at the UK’s most affected areas, such as the West Midland. London may also need a boost to reverse a year-on-year decline of 7.3% (Halifax – Greater London Q2 Report).

Meanwhile, operating conditions in the UK construction economy continued to deteriorate in August, the CIPS/Markit UK Construction PMI index showed. The index registered 40.5 in August, well below the neutral mark of 50. After hitting a low of 18.7 in July, the seasonally adjusted Housing Activity Index climbed 8.5 points to 27.2 in August which remains the third strongest monthly decline since the survey started confirming the market deterioration.

It looks like the European Central Bank will announce some changes in its repo plan to include an increase in the margin requested, which is currently, in comparison to the U.S. Federal Reserve and BoE hair cuts, very limited. Many ABS issuers and investors depended on that plan and it helped drive activity in both the primary and secondary ABS markets. More restriction will limit its purpose and impact.

The weakening economy and poor liquidity/collateral situation has again pushed the European ABS market south and spreads have widened across market sectors:

The housing market appears to be getting worse rather than bottoming. Without more pronounced governmental and fiscal measures, it could continue to weaken, bringing the economy into a state of stagflation or recession. Risk premiums in the European ABS market continued to falter this past week as traders and investors waited to see if the UK government’s latest move will have a firm impact.

Appendix 1: A Brief Review of the Australian RMBS Market

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