Wednesday, April 7, 2010

European securitization markets thawing?

Original posted in Euroweek:

It’s still too early to say that the securitisation market has normalised, but the reception of Obvion’s RMBS last week shows that securitisation is once again a viable funding source. On current trends it might soon, for some issuers at least, provide competitive pricing compared to covered bonds.

Last week, for the first time since the collapse of Lehman Brothers, a European RMBS was priced inside 100bp over Euribor. Obvion, a mortgage lending subsidiary of Rabobank, raised Eu743.5m through its RMBS, Storm 2010-1, achieving pricing of 80bp and 100bp for its two and five year tranches respectively. Previously only short dated auto ABS had breached the 100bp barrier — recent RMBS from the Netherlands and the UK had typically come at around 110-120bp.

By contrast, the covered bond market has begun to show signs of supply fatigue. Last week Bancaja had to cut the size of its planned Eu1bn cédulas hipotecarias by Eu250m and still priced it at 120bp over mid swaps, some 35bp wider than Bankinter’s benchmark covered bond from the week before.

Of course, no Spanish issuer has braved the RMBS market since the crisis and it’s highly unlikely that one would be able to price even a short dated tranche at 120bp over. Yet the price differential between RMBS and covered bonds, which six months ago was as high as 100bp, has narrowed dramatically, leaving issuers with a real choice when it comes to funding options. For instance, Lloyds Banking Group priced a securitisation from its Permanent master trust in January at spreads between 115bp and 130bp, while its first regulated covered bond came at 95bp over mid-swaps.

And when the European Central Bank ends its covered bond purchasing programme in June, that differential could narrow further — securitisation has received no such assistance in Europe, unlike in the US or Australia. Because of the way the ECB has conducted its programme, nobody knows for certain how big an impact its withdrawal from the market will be, but the early signs are that the market will become even more bifurcated between sector favourites and less favoured issuers.

While securitisation may no longer offer issuers the capital benefits of old, the increasing collateral demands of rating agencies for covered bonds are altering the cost/benefit analysis.

Securitisation may prove even more appealing for smaller, lower rated issuers, who would need more collateral to achieve a triple-A covered bond, but not for a securitisation (although they would likely incur more operational costs).

So far most post-crisis securitisation issuance has come from the most familiar names, but a little diversity is beginning to creep into the market, as seen with NIBC Bank’s Dutch MBS XV. Most would describe the firm as a second tier issuer in the RMBS market, and while it had to pay up a little bit, especially for its longer dated notes, the premium was not huge.

The tightening spreads and market stability seen in recent months will hopefully entice lenders from other jurisdictions to test the water, giving investors more options to choose from and forging a path away from dependence on ECB liquidity. Securitisation isn’t going to replace covered bonds, by any means. Since May 2009, there has been some Eu170bn of benchmark covered bond issuance, dwarfing public RMBS placement. But securitisation is slowly returning as a viable funding alternative on cost grounds, not just as a diversification play.

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