The European ABS Market – A Week in Review

The European ABS market weakened again during the past week as fresh negative news from the European mortgage market and the global financial services sector showed that the credit crunch has continued to take its toll on borrowers and lenders alike.

UK house prices declined in July, the Halifax House Price Index showed. The index, published by the UK’s biggest mortgage lender, fell 1.7% in July. That brought the decline in UK house prices to 8.8% during the past year compared to the same period a year earlier.

Meanwhile, the Council of Mortgage Lenders reported that the number of properties taken into possession in the first six months of the year accounted for 0.16% of all loans, an increase compared to the first half of 2007. The CML figures also showed the number of loans 90 days or more in arrears was 155,600 at the end of the first half of the year, a 1.33% increase from the same period a year ago. The CML confirmed its forecast of 45,000 possessions and 170,000 mortgages in arrears for 2008, which is still a small number compared to the total of 11.74 million mortgages in the UK.

Separately, the European Central Bank and the Bank of England kept up their fight against inflation by holding interest rates at 4.25% and 5%, respectively. Inflation has reached 4.4% in the UK, a level that exceeds the central bank’s targeted level.

Finally, JPMorgan disclosed another writedown of $1.5 billion and Goldman Sachs and Morgan Stanley suffered analyst downgrades. These developments, along with the weak positions of Merrill Lynch, Citigroup and UBS, have increased fears about the financial sector in general.

 
Our weekly analysis of the European ABS market’s biggest movers again failed to turn up any improvers. Spreads on deteriorators continue to widen week after week.

In the primary market, several Spanish deals and a new Arkle deal priced at levels that suggested they would be retained.

Arkle cash market levels are graphed below.

The Arkle AAA referenced is also one of the most liquid names traded in the synthetic ABS market, carrying a negative basis of -25bps to the cash bond.

Collateral performance of this master trust is described in Appendix 1. At 0.47%, the measure of 90+ days delinquency is one of the lowest for a prime master trust. By way of comparison, measures of 90+ days delinquency are 1.17% in Permanent and 1.26% in Granite. Even the delinquency of less than 90 days is low with only 0.91% of the Arkle pool, much lower than 1.4% in Permanent 1.4% and 3.12% in Granite.

In the secondary market, spreads across European sectors, ratings and countries have approached new record highs. 

European AAA CMBS now trades much wider than US AAA CMBS and CMBX:

Dutch AAA RMBS is the only sector where levels have remained tighter than before the end of March. The Spanish sector has widened to new record highs.

In the market for UK RMBS, longer average life securities have traded much cheaper than shorter ones, particularly for BBB subprime RMBS.

Notwithstanding all of the negative news, some positive signals have emerged. Oil futures remained below $120 per barrel despite concerns about a widening conflict between Russia and Georgia. The US dollar rallied against all major currencies. And the ECB’s hold policy started to have a positive impact on inflation in some countries, such as France, where the month-on-month price increase declined to 0.2% and yearly inflation measured 3.6%. If this period of macroeconomic stability continues and liquidity concerns ease, the European ABS market should benefit.

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.

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