The European ABS Market – A Week in Review

European ABS trading remained muted during the past week as credit rating cuts continued to weigh on market sentiment.

Recent downgrades have spanned diversely across the market sectors: UK subprime RMBS (Eurosail), Portuguese RMBS (Hipottota), CMBS (Titan Europe 2006-3) and Spain (Santander Hipotecario). Italian RMBS issuer Apulia Finance’s credit rating was upgraded.

Risk premiums have risen on the downgrades. Eurosail bonds traded more similarly to interest-only securities, illustrating the market’s focus on weighted average life in that case.

In a more positive development, Euribor rates have remained stable during the past month maintaining a trend that started in July. The European Central Bank’s efforts to prop up the repo market may have driven this positive impact on short-term interest rates, though the trend may also be a function of summer holidays. Twelve-month Euribor rates have contracted by 0.13 percent on the month.

The five biggest movers in the European ABS market were again only deteriorators. This past week’s top five was dominated by Permanent securities.

Spreads have again widened in the ABCDS market. For the first time since mid-April, Dutch AAA ABCDS spreads, which have consistently been the tightest in the market, rose above 100 basis points.  

ABCDS spreads remained tighter than cash spreads on the majority of AAA securities, as the table below illustrates. Permanent BBB tranches widened significantly on investor concerns about HBOS’s balance sheet. (Please see Appendix 1 for collateral performance provided by Markit Euro ABS Performance).

Three deals were priced in the primary market during the past week, the lowest volume of issuance in the past two months. 

As financial market conditions in the UK and Europe continue to deteriorate, more and more dealers have started to price securities to their final maturity date, as opposed to their call date. The trend has contributed to spread widening and deep discounting of cash bond prices and created some interesting opportunities for investors who have a clear view of an issuer’s financial health and are willing to go long.  (See Appendix 2 for a summary of the most recent CPR within the UK RMBS market.)

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