The European ABS Market – A Week in Review
05/09/08 - 11/09/08
Philippe Pagnotta, ABS Analyst - Markit
philippe.pagnotta@markit.com
| ABS investors around the world welcomed the US government rescue of Fannie Mae and Freddie Mac as the move should boost demand for US ABS and it may have a positive impact on the European ABS market via its correlation. The most liquid sectors in the European synthetic market, AAA UK prime and AAA Dutch RMBS, tightened by an average of 10 basis points on Monday. Markit’s ABX, CMBX and iTraxx financial indices also narrowed on the news, but Lehman Brothers’ struggles limited those gains. |
| Meanwhile, the European Central Bank created a special “Category V” for ABS in its repo policy where the haircut is 12%, or 16.4% for securities whose market prices have not moved during a period of five business days, implying the use of a theoretical price. The move can be seen in two ways. First, it will help the ECB protect itself against delinquencies and price declines. More importantly, it will push issuers to be less dependent on the ECB liquidity plan for financing and to issue more bonds at current secondary market levels, though the plan remains generous. The amended policy is seen by many as a more reasonable solution to the previous 2% haircut. In the case of a real liquidity emergency, ABS participants will have access to this liquidity facility. But the policy’s new criteria have been defined in such a way as to hinder originators from placing retained deals and to go public on the primary market. In cases where a dealer enters into a currency hedge to gain access to the ECB facility and provides liquidity support in excess of 20% of the nominal value of the ABS deal or it is the guarantor, the security will no longer be repo eligible. This plan, which affects classes from AAA to A-rated securities that are the most senior tranches of a deal, will be applicable beginning February 1, 2009. |
ECB haircut valuation levels applied to eligible marketable assets (percentages)
| Liquidity categories | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Category I | Category II | Category III | Category IV | Category V (ABS) | |||||
| Residual maturity (yrs) | Fixed coupon | Zero coupon | Fixed coupon | Zero coupon | Fixed coupon | Zero coupon | Fixed coupon | Zero coupon | Fixed or zero coupon |
| 0-1 | 0.5 | 0.5 | 1 | 1 | 1.5 | 1.5 | 6.5 | 6.5 | 12-16.4 |
| 1-3 | 1.5 | 1.5 | 2.5 | 2.5 | 3 | 3 | 8 | 8 | |
| 3-5 | 2.5 | 3 | 3.5 | 4 | 4.5 | 5 | 9.5 | 10 | |
| 5-7 | 3 | 3.5 | 4.5 | 5 | 5.5 | 6 | 10.5 | 11 | |
| 7-10 | 4 | 4.5 | 5.5 | 6.5 | 6.5 | 8 | 11.5 | 13 | |
| >10 | 5.5 | 8.5 | 7.5 | 12 | 9 | 15 | 14 | 20 | |
| Source | ECB | ||||||||
| Despite this more restrictive announcement, the European interbank rate remained stable last week: |
| On the other hand, the ECB and BoE’s timing is becoming more and more critical. After the recent increase in the unemployment rate (and a probable stagflation) no one expects less than a cut of 25 or 50 basis points in the months ahead, particularly in the UK. Such a move would help bring confidence back to the housing market and to the broader economy, despite the inflation that has resulted from the last 12 months of monetary policy. |
| The market’s top five biggest movers were all deteriorators. |
ABS Deteriorators
| Short Name | Name | Isin | Spread (bp) | Change (bp) | Rating | Sector | Avg Life(yr) |
|---|---|---|---|---|---|---|---|
| GRANMORT03-2 2 A EUR | Granite Mtgs 03 02 Plc | XS0168665718 | 328 | 27 | AAA | PRMBS | 1.2 |
| GRANMAST06-4 2006-4 A7 EUR | Granite Master Issuer plc 2006 4 | XS0275944766 | 340 | 24 | AAA | PRMBS | 3.1 |
| LEEKFIN15 1 Ac EUR | Leek Fin No Fifteen PLC | XS0216897859 | 419 | 21 | AAA | SPRMBS | 1.4 |
| GRANMAST06-3 2006-3 A5 EUR | Granite Master Issuer plc 2006 3 | XS0267967924 | 337 | 18 | AAA | PRMBS | 3.7 |
| PERMAN7 3 C EUR | Perm Fing NO 7 PLC | XS0215351254 | 837 | 14 | BBB | PRMBS | 1.8 |
| While we expected to see European cash ABS spreads tighten this week on the US housing finance news, especially in the most liquid sectors, the market did not move uniformly in a stronger direction. The ECB repo plan, trouble at Lehman Brothers, and continuous negative news about the UK residential housing market and Northern Rock limited the tightening wave to the synthetic market: |
| This US government’s drastic move shows that this financial crisis is unique. Who would have expected in 1968 to see Fannie Mae and Freddie Mac back on US government’s balance sheet exactly 40 years after privatisation? It shows bullish fixed-income investors that no government in the world is liberal enough to allow a massive financial/housing crisis and it may convince neutral investors that there are profits to be made in ABS bonds at today’s prices. |
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| Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Markit Group and its affiliates and are subject to change without notice. Markit has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. |