Wednesday, December 2, 2009

Applause for Arena but analysis gets trampled

Posted on Euroweek:

Investors swarmed over the first public Dutch RMBS since the start of the credit crisis, opening up another jurisdiction for securitisation. But the haste with which Arena 2009-1 was marketed raises questions about how thoroughly investors are examining new deals.

Europe’s securitisation market took another step toward normalisation on Tuesday with the launch of the first Dutch RMBS to be offered to investors for over a year.

Delta Lloyd’s Eu904.5m Arena 2009-1 received a warm welcome from investors, attracting over Eu2bn of orders in just three hours, and the two offered tranches had gone subject by Tuesday afternoon. The short dated tranche was 5.7 times covered and the longer dated tranche 2.6 times. Investor demand was apparently not affected by the lack of explicit protection from extension risk — whereas other RMBS issued recently have featured put options, Arena’s expected maturity is reinforced only with a coupon step up.

Both of the RMBS sold in recent months have come from UK originators and were issued out of master trusts, while the only other European securitisations were backed by German auto loans. The Netherlands was, before the crisis, the third largest jurisdiction in Europe for mortgage securitisation, so its reopening to RMBS could herald a fairly large amount of supply in 2010.

Furthermore, investors’ willingness to back a standalone, amortising structure will be heartening news for the many European issuers unable to use master trusts to issue bullet notes. Indeed, Arena is much closer to the RMBS of yore than either HBOS’s Permanent or Nationwide’s Silverstone issues, which to a certain extent resembled covered bonds. The success of a more issuer-friendly structure could tempt other originators out of hiding.

It’s easy to see why investors would like the deal. The Dutch housing market has fared better than the other major European jurisdictions — the UK and Spain — with prices falling by approximately 6% from the peak. With the exception of the bankrupt DSB Bank’s Monastery series, Dutch RMBS has performed well from a credit perspective. Delta Lloyd’s Arena issuers have performed better than the market average.

Investors’ main concerns have been around extension risk as several banks have declined to call bonds at expected maturities. This risk remains with Arena — although Delta Lloyds has so far exercised its call options — but the step up coupon should offer it more of an incentive to call. The margins step up to more than 200bp, much higher than the low double digit step up margins on pre-crisis deals.

Nevertheless, the speed of the marketing process gives some concern. For all the talk of greater transparency and better market practice, both Permanent and Arena were sold in a tight time frame that hardly allowed for detailed credit analysis. The appeal of triple-A assets yielding a margin of over 100bp was enough to persuade investors to participate regardless. This frothiness is strange for a market struggling to get back on its feet. In the long term, securitisation needs investors who are willing and able to understand deals in all their complexity and issuers should be facilitating that analysis.

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