Can nothing save European CLO equity arbitrage? Triple-As have finally budged from their near year-long perch at 130bp, but even the cost of debt coming down isn’t enough rescue the equity from a tight spot.
The tightening is somewhat seasonal, but there are two other factors at play. First, as GlobalCapital reported last week, there’s a squeeze from a brutal wave of loan repricings so equity needs to fight for every basis point.
Second is the possibility of regulatory change bringing more demand to the market. Now that Solvency II reform in the EU is all but a done deal, there’s optimism insurers will want more triple-A CLO paper. More demand hopefully means tighter spreads.
It’s a tightening everyone can see coming however, because insurers don’t get the capital benefits until next year. That's an incentive to buy now and lock in current levels. Is there a trade to be done for a capital gain? Certainly some might try to make an early move.
Parting ways
Solvency II isn’t the only regulatory change under consideration. The European Parliament is negotiating over how it should seek to amend the European Commission’s securitization package. After a debate in January, proposals from the different political parties were published last week.
Meanwhile, the big regulatory news of the week is UK regulators’ proposals on the securitization regulation. The UK looks set to radically scale back on prescription, as GlobalCapital has urged them too in the past.
The initial market reaction is that the UK rules are getting looser. It is too early to say on that, because the market will still need to regulate itself in line with FCA guidance.
Less prescriptive doesn't mean less stringent. It could mean the opposite. To avoid that will require interaction from both sides to avoid defaulting to the side of caution.
The other problem, a classic of 2016 Brexit referendum campaign, is that the UK can do what it likes, but so many transactions still need EU buyers that UK issuers might just end up having to follow the bloc's rules anyway.
Starting to race?
And finally, it was a triumphant week for BBVA, which priced a huge full stack Spanish consumer ABS. The pipeline of February cash SRT deals is certainly heavier than it has been in the past, with BBVA’s deal already done and more from a Santander joint venture HCBE and Stellantis on the way.
The synthetic SRT market has gone from a Q4-only market just a few years ago to a year-round bazaar. The cash SRT market now seems to be following. Certainly, the demand out there means early movers are benefitting.
