The European ABS Market – A Week in Review

With spreads widening in almost all sectors, the European ABS market’s summer is ending much the way it started.

Fears that commercial property loans may be the next stage in the downturn became increasingly visible across the globe this past week as junior tranches of European CMBS deals (EPIC, Eclipse 2006-3, Titan Europe 2007-3, Eclipse 2007-1 and Deco 12) suffered downgrades and US CMBX spreads continued to widen.  Risk premiums increased throughout the CMBS sector on both sides of the Atlantic:

Economic news continued to paint a bleak picture of the situation in the UK. Difficulties persist in the buy-to-let lending sector, which declined in the first half of 2008, as data published by the Council of Mortgage Lenders showed. Lenders originated 144,600 new buy-to-let loans during the six-month period, down from 176,500 in the second half of 2007 and the 169,500 originated in the first half of last year.

The 18% decline relative to the second half of 2007 was less than the 28% decline during the same period for loans used for house purchases and remortgages.

Arrears (90+ days) in the buy-to-let sector, despite almost doubling compared to the first half of 2007 from 0.63% to 1.1%, remained lower than the traditional mortgage market, which stood at 1.33%.

Separately, UK home builder Taylor Wimpey reported a 96% drop in interim profit and cancelled its dividend, reflecting difficulties in the property development business.

The top five biggest movers in the European ABS market were again all deteriorators:

In the primary market, three deals were priced, including two deals (Fosse and ECF) that priced close enough to secondary market levels to appear to be public: 

(Markit Euro ABS Performance data for Fosse Master Trust collateral is shown in Appendix 1).

Spreads continued to widen in the four main sectors of the European RMBS market. It is important to note that market levels for UK prime RMBS reflect the performance of conservative issuers such as Permanent and Arkle as well as the names like Granite and Aire Valley that have driven the entire sector wider: 

Spreads may continue to widen throughout the European ABS market as trading activity and demand for ABS typically wanes during late August.

Upcoming industry and economic news may also continue to weigh on the sector. Granite (Northern Rock) will publish its collateral performance numbers for July which may further support the bad news released in June.  Granite’s collateral deterioration is largely focused on exposure to the West Midlands, the most affected area in England. Additionally, Nationwide has just delivered their housing index numbers which reflect a 1.9 percent decline for August, a year-over-year decline of 10.5 percent.  Halifax will produce their Housing Index statistics next week which should not be much better than last month either. Finally, with September approaching, investors are waiting for any new actions from the central banks affecting liquidity, inflation, and limit the credit and housing crisis.

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