ING Investment Management in The Hague is looking to invest exclusively in the prime end of the asset-backed market, mostly in residential mortgage-backed securities but also in credit cards and other consumer loans. The Dutch office of ING IM manages about €5 billion in European asset- and mortgage-backed securities, including a €1.6 billion triple-A ABS fund benchmarked against LIBOR and a €765 million mezzanine fund with an average rating of A2. This fund is benchmarked against three-month EurIBOR plus 50 basis points.
Bas Kragten, head of asset-backed securities, said the additional risk associated with non-prime assets is no longer being compensated for given the relative compression in spreads over the past year. "It's just not worth doing deals backed by sub-prime and buy-to-let mortgages these days. In the U.K., for example, they only offer a couple extra basis points of return relative to what you get for prime assets," noted Kragten.
Kragten is particularly positive on prime RMBS out of Italy and Spain. In Italy mortgages are quite attractive since property prices haven't risen as much as elsewhere in Europe. In Spain, the asset manager is satisfied with the credit quality of issuance from the larger banks. However, he is wary of loan-to-value levels creeping up in newer deals and noted the triple-A tranches in such deals are pricing tightly relative to the older Spanish RMBS transactions.
The first True Sale Initiative deal out of Germany, from Volkswagen Bank, was well-structured but Kragten considered it too tightly priced and did not participate. "We didn't have time to fully evaluate the deal," he commented, noting that more and more investors are jumping on deals without performing what he considers the necessary analysis.
