While Dutch RMBS spreads are still well inside UK, the wave of US demand that has driven recent UK deals hasnt borne Dutch deals aloft because many Dutch issuers do not have 144A documentation, or do not offer dollar tranches.
Dutch issuers are waking up to the possibilities in the US, but European demand is still a problem, as Basel III liquidity rules look set to drive away bank treasury demand at the long end. Meanwhile, covered bonds seem to be the darling of regulators, with low haircuts at the ECB and favourable liquidity treatment hurting the non-banks and insurers that make up large part of the Dutch mortgage market.
Demand is also strongest at the short end, with fast pay tranches multiple times oversubscribed, while slower tranches can struggle to find enough demand.
EuroWeek and Rabobank collected four leading Dutch RMBS issuers across the size spectrum, as well as two of the top Dutch investors, and Rabobanks securitisation team, to hammer out what the future of the Dutch market will look like.
The discussion proved lively and spirited, skipping across regulatory standards and lobbying initiatives, as well as progress on spreads and liquidity. Calls for new investors to join the market were matched by calls for better engagement with regulators, at a Dutch level and a European level.
The participants welcomed initiatives like transparency and loan level disclosure, with most reserving their ire for regulatory treatment of ABS compared with covered bonds and arguing that it wasnt too late for this treatment to change.
Dutch ABS market participants have plenty to smile about for now, but the mood in this room was defiant and decisive. Those left in the ABS market wont be taking 2012 lying down.
Bjorn Alink, executive director, head of financial institutions securitisation, Rabobank International
Mark van Binsbergen CFA, managing director DCM, head of European financials, Rabobank International
Erik de Boer, director, treasury and financial markets, Friesland Bank
Erik Bongaerts, director, treasury, Van Lanschot Bankiers
Max Bronzwaer, treasurer, Obvion
Menno van den Elsaker, senior portfolio manager, fixed income, APG Asset Management
Tom Hoefakker, vice president, corporate treasury, Aegon
Katja Pazelskaya, executive director, ABN Amro
Amir Maani Shirazi, head of ABS investments, Robeco
Paul Vanner, managing director, head of syndicate and new issues, Rabobank International
EUROWEEK: Lets start with Basel: What kind of impact is the liquidity coverage ratio (LCR) having on ABS investors?
Paul Vanner, Rabobank: This years been a really good year so far; the Fosse [2011-1] transaction was a massive success, £5.5bn equivalent. But a £3.75bn equivalent deal, issued in different currencies, dollars, pounds and euros, with a book of over around 80 investors thats great. It proves that ABS needs to be taken seriously by the investing public and by issuers alike.
Theres a lot of good stuff going on in ABS, but there is some discrimination vis-à-vis covered bonds and its nowhere more obvious than when you look at spread levels. If you take Dutch, look at five year Dutch covered, where thats trading and where issuers can issue, youll be 55bp-60bp against five year swaps. Now look at what you would be paying in traditional ABS format and theres quite a gulf.
We are seeing new investors coming into the market but there are definitely issues with the comparison to covered bonds that are tricky to resolve.
EUROWEEK: But how much of that is due to bank treasury desk demand that will be directly hit by the LCR?
Vanner, Rabobank: Covered definitely has a bigger pool of buyers. So its hard for me to specifically say that the liquidity discrimination costs or implies another X basis points, but its certainly a factor.
Bjorn Alink, Rabobank: Its partly about liquidity available in the market now, but its also about the upcoming regulations (including the new liquidity rules). So we have a kind of a chicken and egg story; less investors due to unfavourable regulation means less liquidity in the ABS market which makes it less likely that ABS will count as a liquid instrument in the regulations going forward. Thats the ultimate problem of the Basel situation in this respect for the ABS market.
EUROWEEK: But do we also think that the proposals being put forward now favour covered bonds over ABS?
Mark van Binsbergen, Rabobank: You could certainly argue that they do you do not get any recognition for ABS in the liquidity buffer. Shouldnt we expect that there would be more lobbying against that? The asset base, which is underlying ABS or covered bonds, is the same, so why should there be such a differential treatment?
Often these regulations get watered down over time. Implementation of the LCR is a long way off, were talking about seven years away. Should so many bank buyers be diverting away from this market? We in the market should be lobbying against it to make sure ABS gets a fairer treatment.
Erik de Boer, Friesland Bank: I agree that we should be lobbying, but banks are already implementing these changes. I imagine lots of banks are anticipating the regulations, and putting their LCR liquidity arrangements in place today.
Katja Pazelskaya, ABN Amro: Were missing a strong lobbying organisation that is able to give a proper response to regulatory and rating changes. The covered bond market has been very effective at lobbying, but we havent got such an effective organisation in ABS.
Tom Hoefakker, Aegon: It seems like the lobbying effort from Germany, France, and the UK worked out very well for them. ABS is more important in the Netherlands than in the other countries. Our clients will unfortunately pay the bill for this regulatory treatment because it will be less attractive to fund in the ABS market.
Pazelskaya, ABN Amro: I think its especially the case for those entities with lower credit ratings. If you look at ABN Amro, our senior unsecured is priced tighter than ABS, and our covered bonds are at one of the tightest levels that you can observe in the Dutch market. But thats not the case for all the originators, especially not the case for other mortgage originators. They depend quite strongly on securitisation for their funding.
Alink, Rabobank: The proposed regulation does not fit the Dutch situation very well. We have a large number of non-bank mortgage lenders that are currently active in the ABS market that cant issue covered bonds. These banks would need to establish banks to issue covered bonds which is very cumbersome. This makes it a different story in the Netherlands, and to some extent in the UK, compared with the rest of Europe.
Pazelskaya, ABN Amro: The interesting question is the impact of such regulatory environment on mortgage origination in general and growth in lending.
Menno van den Elsaker, APG: The way regulators see securitisation is very bad, and they are expecting the industry to come up with something. They have said, more or less literally: Stop complaining about the unfair treatment versus covered bonds. Show us why its unfair; come with an initiative to make things better.
However, I think its strange that the Dutch Central Bank or the regulators in the Netherlands havent pushed back a little bit against Basel III draft plans, given that securitisation is so important for the Dutch market. The way the plans look now, its more or less a French and German construct, which is definitely putting the Dutch market at a disadvantage. So its up to us to push back.
EUROWEEK: But as a non-bank investor, how do you look at the asset class going forwards, knowing that there could be a smaller investor base once the banks stop buying.
Van den Elsaker, APG: The current performance of ABS is almost purely determined by technicals. Fundamentals and valuations look attractive but the technicals (i.e. supply and demand), at the moment, are the driving force of spread movement. There are US investors coming in big time, but its still a small market, so theres just a huge demand for ABS.
But in the longer term, theres a less clearer picture. Bank investors could stop buying, and maybe insurance companies as well given Solvency II. On the other hand, ABS is still very attractive for us at the moment.
Erik Bongaerts, Van Lanschot Bankiers: Because you get a great spread as an investor.
Van den Elsaker, APG: Yes, we have the infrastructure, the systems and the people in place. So we feel we can analyse it quite well. And like you said, the spread difference is quite impressive.
Bongaerts, Van Lanschot Bankiers: ABS is the same kind of credit as a covered bond, and there are quite big spread differences. However, all the bank treasuries have real difficulties buying RMBS because of the LCR, and also because of the new liquidity rules of the Dutch Central Bank that are already very unfavourable for securitisations. The Dutch Central Bank rules arent delayed until 2015, they are being implemented this month for the first time.
On the other hand, if I was looking at the assets as a real money investor theres a great way to arbitrage that kind of difference.
If one category of investor cant buy ABS, Id love to be an investor who isnt subject to these rules and can buy these assets at wide spreads.
Van den Elsaker, APG: That makes sense for the existing investors, but surely what the market needs is new investors?
Vanner, Rabobank: And were getting them. There are, at the margin, new people coming in, and champagne corks pop at the syndicate desks if new investors turn up. There are also some big buyers that are hovering.
All the noise about liquidity maltreatment notwithstanding, you get paid for it the point about the spread differential is exactly right.
Covered is tighter year-on-year, while ABS is not. Max [Obvions Storm 2010-1] printed A2 notes in March 2010 at 100bp over three month Euribor.
Max isnt going to be able to print at that level today, sadly. So ABS is wider, even for the best names in Holland, but covered is tighter. So the smart money should be buying ABS.
Performance this year has been good, and its that delta that needs to narrow ABS versus covered. And the only way that will happen is by getting new buyers to come in.
Bongaerts, Van Lanschot Bankiers: Spread changes can happen in two ways, of course. For the banks issuing RMBS, the alternatives are to use the senior market or the covered bond market. If the spread difference gets too wide youd stop issuing RMBS and opt for the other type of issues. Of course you would prefer to use the whole spectrum of instruments, but youd make choices based on where the spreads are at the moment.
Pazelskaya, ABN Amro: Thats exactly right. If you look at the funding ABN Amro raised in 2010, youd see that out of Eu26bn of long term we raised in 2010, over Eu11bn was in securitised format. In 2011, ABN Amro has already raised over Eu12bn, and only Eu500m was in securitised format. If there are other funding sources available which are cheaper, they become more attractive for the bank and take stronger position in banks funding mix.
Another consequence of current market environment is that weve started looking at other markets. ABN has started to sound US and Asian markets. The uncertainty around European regulation resulted in a decrease of the investment power in Europe, especially on the banking and treasury side. That encourages banks to look for an investor base outside Europe.
Amir Maani Shirazi, Robeco: I also agree with Menno we hear lots of people talking about regulation, saying ABS and covered bonds are not treated equally. But we should think about what we are actually doing ourselves.
Looking at covered bond regulation, at the end of last year we saw that there was a rule that the bid/ask spread should not be wider than Xbp if you observe market levels. A segment of the covered bond market did not comply so it made that rule difficult to implement in the future. And the regulators suddenly changed the rules.
So it is possible to get regulatory changes made, and I think the whole market, issuers and investors, should really think what we can do. Sitting here and complaining doesnt help anybody.
Max Bronzwaer, Obvion: Its also a matter of targeting the lobbying and the explaining. I think one of the problems in the Netherlands is that as issuers and investors we didnt convince the regulator itself and the Ministry of Finance. That meant the people who should be putting across the Dutch perspective at the European level were not convinced in the first place.
The industry needs to target people that influence European institutions, which means starting with the national regulators. The German government and the German regulator are the best lobbyist for financial regulation which is beneficial to German issuers.
Shirazi, Robeco: I get the feeling that its easier to place short bonds, because people say the liquidity coverage ratio will only kick in by 2015, and the bonds that Im buying now will already be redeemed. So something needs to be done by then, otherwise the market will be very different in two or three years time. Developments today are positive, but are they sustainable?
EUROWEEK: What do you think are the positive developments?
Shirazi, Robeco: You see some new investors coming in, you see discussion about issuance down the capital structure, and you see more sectors coming back non-conforming, CMBS and so on. The new issuance market is increasing every year so these developments are fine. But you need to look at what are people are actually buying and longer dated bonds are less easy to place.
Vanner, Rabobank: If you look at A2 [usually five year] books and look at the deal sizes for non-144A deals, youll see that coverage ratios and deal sizes are smaller year-on-year. But there arent issues around A1 tranches, unless you come really really tight. A2 is something that exercises syndicate minds a bit more than A1.
Shirazi, Robeco: We also tried to track that information, and look at who is investing in which tranche.
You might see half of it going to asset managers, but who are the clients of asset managers? It could be banks and insurance companies. If clients of asset managers disappear, that could also be a difficulty, so we really need to be on top of things and to see if any changes can be made. It may be a bit late, but its not too late.
Van den Elsaker, APG: Afme and the European Securitisation Forum are the ones to lead this. There is an industry initiative, the PCS, whatever you think of it.
But at least theres a European lobby group speaking regularly to the ECB and to the different departments in the European Commission.
We have been part of the PCS from an early stage. At some point it died a little bit and what you see now is that its getting revived again. Various issuers and investors have now realised something has to be done. The message is clear from the regulators: Okay, you guys have to do something.
Alink, Rabobank: I am already involved to some extent. The issue with the initiative in the past was that it was too expensive for issuers in my opinion. It was almost like a new rating agency. I think that meant Dutch issuers were not interested. I think this has changed a bit so maybe we should raise it again and restart the Dutch end of the project.
Van den Elsaker, APG: They put a consultant as a project manager so that means people dont need to take so much time to be involved. What went wrong in the past was that a lot of people that had a vocal viewpoint on ABS werent the ones issuing or investing in ABS. So thats why some investors and issuers said something like: This is a purely political process, lets get away from it.
Bongaerts, Van Lanschot Bankiers: The fundamental question is what is the real purpose of the LCR? The original idea was that they dont want the banks to cross-hold each others debt, and calculated the liquidity needed to avoid this.
But in Germany, banks keep on buying covered bonds from other banks. RMBS is the same of course just securitise it, keep it on your books, or sell it to the market and buy RMBS from other banks. I think the original idea from Basel was to stop doing this.
So is this the wrong idea?
Thats the reason we never lobbied against it. The only thing is that we dont have a level playing field any more. The covered bonds lobby managed to get covered bonds into the liquidity ratio again and RMBS is still excluded; that is just unfair
Van Binsbergen, Rabobank: There really should be a more European trademark to help on this, which recognises the quality of all the European ABS instruments. Thats what Afme is doing, and what we should join in with. If its just two entities, one investor from the Netherlands and one issuer from the UK, its clearly not enough. So we need to stand up and unite on this.
EUROWEEK: So is this where the regulatory fight back starts? What can we realistically hope for by 2015 can we really expect ABS to go in the LCR?
Shirazi, Robeco: Well, there could be a level three, to go along with one and two, which will make it less black and white.
Vanner, Rabobank: If you get it in the LCR spreads are going to come down. So everyones got to be aligned. Its going to be cheaper for housing, because mortgage margins can down. Its going to trade nearer to covered bonds.
Im not convinced that all covered bond buyers do their homework and know what theyre buying. I really dont believe it. With ABS I think you actually get a much better product.
Hoefakker, Aegon: When regulators take ABS into account again, I think our clients will ultimately get the benefit, because their rates will drop. As a consequence rates in the Netherlands will be more in line with rates in Germany and Belgium. We all have a responsibility in that area. This can bring down the mortgage rates for end users in the Netherlands.
Alink, Rabobank: But I do think there has to be a distinction of course for retained transactions. I think thats where theyll have a problem how are they taken into account in the LCR?
Shirazi, Robeco: I think thats easily solvable.
Alink, Rabobank: It is easily solvable, and it can make them less of a problem. Saying that, I think retained transactions are still very useful, because you can still fund, in times of stress, with the central bank. That makes retained ABS just a good risk management tool.
Bongaerts, Van Lanschot Bankiers: It worked for us during the crisis we did not need government support, but we also had a lot of retained assets on our books which we could readily use for liquidity.
It might be a bridge too far to think that ABS will be treated on a par with covered bonds, but it might get close to it.
Bronzwaer, Obvion: Its also interesting what other jurisdictions, mainly the US, are doing. If you look at Basel II, they didnt do as much to adopt that as in Europe. Australian regulators have made RMBS eligible under the LCR, on a unilateral basis, recently. So it will be interesting to see what influence these moves have on international regulation.
Pazelskaya, ABN Amro: I havent seen any major regulatory changes that have had a negative influence on the liquidity of US ABS. The less you are doing to ABS from a regulatory and rating perspective, the better it is, because the market is still quite fragile. And if you observe how the US is managing ABS regulation, they simply dont do as much. The discussions were having in Europe are not as prominent in the US.
Alink, Rabobank: Is it interesting to talk about the US now? Their ABS market changed beyond recognition during the crisis, but theres still good investor demand there.
Pazelskaya, ABN Amro: I think the full US RMBS securitisation market is over $1tr, and theres a high concentration of redemptions in the coming years. Because the investor base over there is less segmented than in Europe, accounts that invested in government guaranteed programmes will probably get cash available to reinvest in other types of paper, among others ABS.
US investors are also very well equipped to assess the risks in ABS. The feedback that you hear from the US is that European, especially UK and Dutch securitisation paper, is extremely interesting. Even if its a bit less liquid than US ABS, its priced much wider than for instance US agencies issues, which creates an attractive differential.
Van Binsbergen, Rabobank: I think the liquidity issue is more about opinion. Liquidity in European paper might be a bit lower, but maybe thats a question more for the investors here. Why is the relative value from ABS so much more attractive? Isnt the illiquidity premium overstated?
Van den Elsaker, APG: I would even argue that maybe the liquidity is not as bad as in some covered bonds. Maybe for Germany and France it is, but looking at the peripheral countries, including Spain is a different story.
In the last few weeks weve had a lot of stories around peripheral risk, and Spanish covered bonds went 30bp wider. And you couldnt trade for Eu50m any more, it was Eu10m to Eu25m at most.
If you look at Spanish RMBS, most of the dealers have two-way axes, and can show paper of Eu25m. I think in those countries liquidity in ABS is not as bad as it is perceived.
Van den Elsaker, APG: I think thats one of the points that we should make more publically as well. Tell the regulators to look at how the market is functioning. To be honest, theres almost no paper in the secondary market to offer in size. We got a small mandate, some inflows, for short Dutch triple-A RMBS, and we literally had to work with clips of Eu2m here, Eu5m there.
Vanner, Rabobank: Its absolutely right we had some short Storm paper, which came in and went out. The problem is the offer in UK and Dutch RMBS. You just cant get paper because when it comes in it gets placed immediately.
Van den Elsaker, APG: Which is a good thing, because it shows that the investor base in European ABS is committed to the asset class, but it doesnt help liquidity.
That is one point I want to make about US investors coming to Europe, which is currently a good thing. Issuers should realise that the US investors are different from Europeans theyll trade it, the moment its less interesting any more they will sell it.
Vanner, Rabobank: We could do with that a bit more in Europe.
EUROWEEK: Do you expect any issuance from Dutch originators into the US any time soon?
Pazelskaya, ABN Amro: Its a public secret that ABN Amro is currently considering covered bonds and RMBS programmes in 144A format. We all know that making the programme 144A compliant is a lengthy process.
But its difficult to say exact timelines and even if I knew them I wouldnt say. But lets put it like this: there are clearly good opportunities in the US for both of the instruments and it would be a shame to miss out on them.
Vanner, Rabobank: I think Fosse proves that beyond doubt. Youre dealing with a homogenous set of buyers and theyve got a lot of money to put to work at levels that they think are really, really cheap. Its as simple as that.
Anybody that can get 144A in place and deal with the legal aspects to it will find it well worth doing. It gives you options.
Pazelskaya, ABN Amro: What I have observed so far in the markets is that euro issuance in public format is quite limited. I havent seen a long dated, like a five year, non-preplaced tranche hit more than Eu500m. So it looks like the current standard in public euro format is limited compared to the past, and that isnt the case for US or sterling tranches.
Hoefakker, Aegon: We are not working on 144A yet, but it is on our radar. Aegon is a familiar name in the US, so were used to 144A issuance. We see the investor base in Europe as growing, but not that much. So we will certainly look at this possibility.
Vanner, Rabobank: I think its a must if you want to get size. The dollar market is shorter duration but theres big, big size. I think you can do more in euros than Eu500m, depending on how you approach the market, though I know what youre trying to say.
So euros is somewhat size capped, but you can get a pretty decent chunk, but dollars is a bit of an elephant in the room at the moment.
There are a couple of big buyers in dollars, so if they like you, thats great. If they dont, they dont, but theres no reason why they wouldnt. As an issuer, if youve got 144A then thats what they need. And that brings many more fund managers into play.
I would expect all the investment banks that do these trades to be knocking on peoples doors and urging them to get 144A in place.
EUROWEEK: Can we hear from the other issuers on that?
Bronzwaer, Obvion: We are looking at all kinds of alternatives, 144A being one of them. But its still in the planning phase and we do have plenty of opportunities available at the moment, so we are not embarking on one of the more complex funding instruments at the moment. But Fosse shows its definitely an alternative out there. And all the signs are there and weve spoken to US investors a number of times, and the market is definitely there in size and in the future.
Bongaerts, Van Lanschot Bankiers: I am pleased that the big issuers are talking with US investors, but, as a smaller issuer, we definitely dont have any plans there. However it is good for all of us that the big players are doing this.
Van Binsbergen, Rabobank: That also maybe ties into the question of private placements. Thats an alternative that weve seen used in the past and weve seen more activity into private investors who may be using repo markets on the back of this.
The repo is really a trend of late. Im curious to see if private placement or repo trades are a worthwhile alternative to increase issuance in euros?
Van den Elsaker, APG: It wouldnt help the market in the long term. Because then the market remains a niche thing. What we need are new investors. A maturing market is not characterised by a lot of private placements. Clearly there should be private placements, but it shouldnt be the dominating force. Public issuance with a lot of different investors helps the market.
Hoefakker, Aegon: From an investor point of view, Im interested in this. From an APG and Robeco perspective, is it a concern that there is a large part of the Dutch market just placed with one counterparty, with one buyer?
Shirazi, Robeco: It has helped the market, of course, to get new issuance going, but in the long run we would like to see more participants and its not a good thing to rely on a few large buyers. It doesnt help our liquidity.
Bronzwaer, Obvion: The question should be then, how does our discussion about how little paper is available in secondary relate to the limited issue size that we are seeing in the primary market now?
Apparently the strong demand doesnt show up in increasing issue size. On the contrary. The primary issue size is limited, but on the other hand you have more demand than supply in the secondary market.
Vanner, Rabobank: So youre asking why arent secondary spreads in UK and Dutch prime appreciably tighter? Why dont investors pay more so theyd get size, with limited supply on the horizon. They need to put that cash to work, and what else can they do?
For example, were showing Storm at 123bp/119bp at the moment. As an investor, you can buy Eu2m, because you get shown Eu2m, and you end up lifting an offer of Eu2m rather than putting in a Eu20m order, and saying Good down to 120bp, go and work it and come back and tell me where you are.
Shirazi, Robeco: In general, you could also say that the spreads on the secondary market could be too tight and that people would rather wait for new deals coming in. Thats maybe the whole point.
Bronzwaer, Obvion: Even on the new deals, if you come at 125bp, youre stuck at Eu550m-Eu600m or so.
Pazelskaya, ABN Amro: Could it also be seen from the point of view of the issuers being unwilling to pay up for volume?
Vanner, Rabobank: I think you are paying already. Most deals that have come this year in vanilla UK and Dutch RMBS have come with new issue concessions that have been right at the time, whatever they are, five basis points. And it depends on the day and the general market backdrop, but ABS, and covered bonds have been paying reasonable new issue concessions for a triple-A product.
Van den Elsaker, APG: Its because the investors who are buying it know the product and are comfortable with it at these kinds of spreads, but you see a clear tiering between post-crisis issuance and pre-crisis issuance. Lots of people like post-crisis new issuance deals with high running coupons, and as soon as you have that in your portfolio, its a good thing.
Vanner, Rabobank: Youre absolutely right. And theres another point: in the books of deals Ive worked on you dont see trading houses coming in and bunging in orders for Eu10m-Eu20m, to get bonds, so theyre axed to trade around it when its gone free to trade.
In the old days youd get every man and his dog trying to come into a deal. Allocation processes are now about issuing close to the book size when you have that flexibility. Youre going to cut back a little bit, hopefully giving it a little bit of performance on the break, but then if theres no trading going on around there, its strange.
Alink, Rabobank: Maybe good to ask a question to the investors. Is it the case that pre-crisis transactions influence the pricing on the post crisis transactions in a negative way? Are there too many pre-crisis transactions still being on bid lists, which need to be sold?
Van den Elsaker, APG: Im not sure about that. I think whats coming out of bad banks started with the good stuff, and so weve seen the Dutch RMBS coming out already. Its just a matter of reality that the investor base has shrunk compared to the old days, and right now it looks like the European investor base is balanced at deal sizes of Eu500m-Eu750m, and thats why we need new investors.
It should become a full-grown, mature credit sector. Institutions like APG play the whole credit universe, (i.e high yield, investment grade corporate bonds, covered bonds) but ABS is still a niche thing, and luckily we can invest in it, and it helps us big time. But theres still a lot institutions that dont see ABS at the same level as the other products.
Pazelskaya, ABN Amro: What would help investors to be less cautious about this asset class?
Bongaerts, Van Lanschot Bankiers: I would say regulatory treatment, because that gives a signal to the whole market that its over the stigma.
Van den Elsaker, APG: We started the year with S&P coming out, and here we go again.
For new investors who started in 2010 with a triple-A mandate and then they see in the beginning of 2011 a huge proportion at risk of being downgraded on the counterparty criteria that stuff doesnt help either. But at some point performance will show. Institutions with ABS portfolios in it will, in general, outperform the ones who havent, and thats why the US investors are stepping in as well.
Van Binsbergen, Rabobank: So what about the transparency measures that are being implemented, for example loan level data? Thats a real push for transparency and homogeneity, and thats one of the things cited that might help liquidity. Should there be a more homogenous product? Are the efforts so far good first steps, or are they too complicated for the wider investor public?
Shirazi, Robeco: Its a necessary step. Why would an asset manager who was not involved in ABS get involved? Theres a lot of reputation risk, and you have to convince people in senior roles that its a good idea. However, if you keep reading your newspapers, where there is only negative comment, with maybe half of it not true, then you will never get there. So you have to do something on transparency, which can help to convince regulators, and then the whole thing will fly.
Van den Elsaker, APG: I think that this is the moment, because now you can compare it to the covered bond market. You can say: Look, we have the loan level data and we are working to improve the investor reporting as well.
If you can show the regulators how much information issuers give to investors here, and how investors can analyse it, then it looks pretty transparent compared to covered bonds. Its one of the things you can put forward as a positive thing about ABS.
EUROWEEK: What do you think of the ECB initiative to have one European portal for loan level data? Do you think that is better than the current situation, where you see more issuers providing loan level tapes?
Van den Elsaker, APG: It makes it more public, I would say. Now you often have to sign a confidentiality agreement, and then you get the loan level data from the issuer. I clearly do welcome the ECB initiative. We had a conference last year in the Netherlands where there was still some reluctance to make loan level data available, but every new deal is offering it.
Alink, Rabobank: I think loan level data is a good initiative, but its also very time-consuming to analyse a full loan tape. What do you think of that as an investor?
Van den Elsaker, APG: Thats a comment we hear regularly, and which I dont necessarily agree with, especially if its in a regular, standard format. Lots of third party systems are developing as well. Pre-issuance models are available, based on loan level data, and if its standardised, it makes it much quicker and easier to compare.
Alink, Rabobank: I agree with you, but should the Dutch do something special on standardisation, or just work with the European initiative and do nothing in addition?
Vanner, Rabobank: I think its a really good initiative. I totally agree with Menno. If you think about the information that you routinely get in deals coming out today that you didnt get before, thats really positive.
Everyone thats in this market and has been in it for a while has got to be happier about the disclosure theyre getting now against three years ago.
EUROWEEK: What about the bail-in on senior debt? RMBS works as a bail-in proof instrument just as covered bonds do, so when this comes in, maybe this will bring in new investors?
Shirazi, Robeco: People are already taking that into account. The bail-in is going to be there, and I think there are other issues that we have, which we have already discussed. Those issues need to be solved before bail-in effects become relevant. All the tools are there, meaning transparency and so on, but we have to unite and make it happen.
Bronzwaer, Obvion: Its still largely psychological for regulators and investors, and certainly senior management with investors. Portfolio managers understand the product, and understand that Dutch RMBS is a totally different ballgame from US subprime. But for some groups politicians, policy makers, supervisory boards RMBS is the rubbish thing that started the crisis, without any distinction or nuance.
In my mind its largely coincidental that covered bonds are heaven and RMBS are hell, because of the fact that it started with subprime RMBS. If the crisis had started with subprime covered bonds, I think it would have been the other way around and liquidity of European covered bonds would have dried up.
I dont think that for Dutch RMBS were going to improve the market by providing evidence that collateral performance is OK, the pool is OK, and the loan level data is available, because everyone in the market knows that that is not the problem.
Van den Elsaker, APG: Its the people outside and the sentiment.
Bronzwaer, Obvion: So its a matter of beating the drum with regulators and with investors, trying to point out the differences between Dutch RMBS and US subprime, trying to overcome the psychology factor.
Van Binsbergen, Rabobank: Maybe theres missionary work that the investment banks can do. Start knocking on more peoples doors, doing workshops, and trying to educate the wider investor base.
Bronzwaer, Obvion: What investment banks are doing in that respect in the US is falling on very fertile ground, but in Europe, where there were fewer problems with RMBS, that is not the case. Thats an odd discrepancy.
If you look at RMBS in the US, which was at the heart of the crisis, the efforts that investment banks are making now in the US to educate the US investors are very successful. Theres a very good reception by investors, as Fosse proves. But on the other hand, doing the same job with European investors for European RMBS apparently is much more difficult.
Pazelskaya, ABN Amro: If you look from a sentiment perspective, it looks like all the instruments that recourse to the bank, rather the SPV, are market favourites.
So I was wondering what would give a push to the development of a new instrument?
Do you think it could also be the time for long term ABS-backed repos or...[smiles] covered bond backed by RMBS?
Shirazi, Robeco: We dont think so... People are complaining about transparency, and then you put what they perceive as a complex product into another product, which is even more complex. There are a few deals out there, including Société Générale, and some of the other French Obligations Foncières, plus an Italian deal from Intesa Sanpaolo.
Id be amazed that covered bond investors who want to buy covered bonds over ABS because of sentiment would look at such a thing. It isnt consistent, because an ABS-backed covered bond is even more complex.
Bronzwaer, Obvion: Right or wrong, it will be perceived as like a CDO2.
Vanner, Rabobank: One reason to do it, in the case of Italian issuers, is that Italian ABS deals are not easy. So it would be easier to do covered, and maybe Intesa had an RMBS there that they just popped in.
Pazelskaya, ABN Amro: I heard from one Italian issuer, not Intesa, that they were just running out of collateral. When they have to issue covered bonds directly its just not efficient from a collateral point of view.
Van Binsbergen, Rabobank: Well maybe theres a question for the issuers here at the table what is the maximum level of issuance, bearing in mind asset encumbrance? This is a theme in the covered bond market, but it also applies to ABS. Are you more careful with the type of assets you want to encumber? Does it restrict your flexibility in issuance? And how do investors view asset encumbrance issues?
De Boer, Friesland Bank: Its important that you maintain a healthy balance sheet. But I must admit that discussions with the regulator are more intense than they have been before. We are discussing what constitutes a healthy balance sheet, regulators havent offered guidance on that. There are opinions, and thats it.
Vanner, Rabobank: But you cant forget the rating agencies, because theyll be looking at how much is pledged, wont they? I dont think any bank is so complacent that if they get put on watch, they would ignore it. Banks certainly think about what their rating is, where their ratings going, and what the rating agencies are saying to them.
Van Binsbergen, Rabobank: You could argue that from an investors point of view if you have a claim on the assets why be concerned about the asset encumbrance on the rest of the balance sheet? You could also argue that theres an increased level of wholesale funding, which means that this issuer will have to access the market more often, which could also impact your investment positions.
Shirazi, Robeco: I think it would mainly impact the unsecured investor, not the ABS investor, because our pool is defined, and thats where our cashflows come from. On the other hand a healthy and creditworthy originator is also important for the ABS investor.
Hoefakker, Aegon: Aegon Bank is not the biggest player in town, but if you held a ratio discussion on covered bonds, wed be able to do one or two covered bonds, then basically were there. I can see from a regulators point of view they want to protect our clients so thats a logical point of view.
For covered bonds maybe something can be done to reduce over-collateralisation, or maybe get some extra funding out of a covered bond, perhaps with a junior piece to get more funding by using the same collateral.
Alink, Rabobank: In terms of perceptions, I think its important that the Netherlands is one of the only countries where a bank went bankrupt.
On one hand, its shows that securitisations are remote from issuers, so that is a good story, but on the other hand, it shows that Dutch banks do default. In Germany, for example, no bank defaulted to my knowledge. So I think its two stories.
Vanner, Rabobank: I think the other point to make on the asset encumbrance issue is this: personally, as an investor in senior unsecured, I wouldnt be worried about banks doing covered bonds. I think that its good that they do cover bonds; its good that they do ABS, and its good that they do senior unsecured. Any bank thats got access to all three, brilliant. Im not worried about covered bond issuance in the abstract, though if we see senior spreads blowing out, thats obviously an issue. But I fully understand why banks are issuing bucket loads of covered bonds.
EUROWEEK: With the search for yield, you could argue that there will be more activity developing in the lower rated tranches, and into the mezz. But that seems quite scarce will we see more?
Van den Elsaker, APG: I think the decision comes from the issuers. They just dont want to pay for the mezz.
Bongaerts, Van Lanschot Bankiers: Its way too expensive, in my mind.
Pazelskaya, ABN Amro: Exactly. Its also the new regulatory environment we are in, where you use ABS for funding purposes, rather than for capital and risk transfer. So therefore you just look at funding costs while issuing.
First, its difficult to price it in general, because there arent many pricing benchmarks. Secondly its going to be way too expensive. And thirdly, what is the purpose?
Bongaerts, Van Lanschot Bankiers: RMBS we use mainly for funding, never risk-transfer. CMBS we use for both transferring risk and getting cheap funding from the triple-A tranches, though at the moment these are too expensive, so at these kinds of spreads we can easily run the risk ourselves.
Vanner, Rabobank: People always ask for mezz, but funnily enough, the answer is always no.
Van den Elsaker, APG: Its getting there. If you look in secondary, some B tranches in Dutch deals are breaking 200bp already.
Alink, Rabobank: But still its too expensive.
Van Binsbergen, Rabobank: Everybody focuses on the triple-As, but if there was a proper double-A tranche, would that be something to look at? Youve seen performance throughout the cycle, and with more transparent and better structured deals, maybe it would make sense not to just issue triple-A, but a proper double-A. Pricing should not be that much wider.
Shirazi, Robeco: For us it depends on client needs, and clients are focusing on senior paper and not mezzanine. You need to convince them that senior ABS is interesting, and then the next bridge would be looking at mezz. Maybe its different when youre running your own book with your own money, but we have to respond to clients.
EUROWEEK: But as a maturing market its not so good to be hung up on triple-A, surely?
Bronzwaer, Obvion: If the market redevelops the same as we saw before the crisis. Eight years ago, mezz wasnt that hard. 2004 to 2006, all the investors were getting educated, understanding the product very much better, and taking on a little extra risk for a premium. If you look at the prime Dutch RMBS names, there isnt really any extra risk compared to a triple-A. Thats why we saw a huge spread compression between 2005 and 2006 everybody who did his homework, realised that there was negligible extra risk.
Van Binsbergen, Rabobank: But the point was that if you compare with the covered bond market there are more programmes coming out that are double-A, and the differential with triple-A is not going to be very wide. So why should that not apply to the RMBS market?
Alink, Rabobank: But overall you need only a little extra credit enhancement to get to triple-A. Although you could structure to get a larger double-A piece, or structure the senior notes as double-A, its never useful not to structure a triple-A because double-A spreads will always be higher.
Vanner, Rabobank: Its trading up, in Eu1m and Eu2m pieces, but anecdotally it is better bid. However, I agree that its too expensive for an issuer. Its really cheap for investors if they get the right mezz in the secondary market, but I could never recommend to a blue ribbon issuer that they issue it. I could sell it all day long, its just that it would not be cost-effective.
EUROWEEK: What about capital relief trades, which were a big issue Basel I or Basel II trades. It seems like banks dont have much interest in doing these at the moment. Are they coming back?
Van den Elsaker, APG: Most of the capital relief deals that we did throughout the crisis have been called and have performed very well. Were still open for it, but banks have less interest in doing these trades anymore. The ones that are being shown are on more exotic assets like shipping, counterparty risk and project finance, which is less straightforward. Thats still some stuff to be solved there.
Dutch ABS Roundtable 2011
Dutch ABS continues to stand out in the European market, with tight spreads, exemplary collateral performance, and a regular, diverse stream of issuers. Talk of a crisis is a long way past — but spreads are no tighter than a year ago, and public deals seem stuck for size.
While Dutch RMBS spreads are still well inside UK, the wave of US demand that has driven recent UK deals hasnt borne Dutch deals aloft because many Dutch issuers do not have 144A documentation, or do not offer dollar tranches.