Softer euro ABS spreads: a gift to the buy side

The small, but noticeable, downward shift in investor appetite for new issue euro ABS bonds over the past few months has meant that bank syndicates and issuers have had to work a bit harder to cajole investors and get deals done.

  • By Asad Ali
  • 11 Sep 2018
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While the wider spreads being offered have made funding costs more expensive, investors still willing to engage have an opportunity to buy bonds offering some of the best value this year.

Hardly anyone gets market timing right repeatedly over the long term, a reality shared by issuers and investors alike.

But when regulators start tinkering, their extra hand on the rudder can momentarily offer a choppier ride, leaving some investors feeling a bit queasy and leaving issuers unsure of demand.

That appears to be one of the reasons why some bank investors have been reluctant investors lately, according to two treasurers on recent deals. One treasurer noted a marked decrease in ticket sizes in the order book during the marketing process.

Lately, investors have been voicing not only Brexit related worries, but concerns regarding regulators' reluctance to grandfather existing deals as simple, transparent and standardised (STS) — one of two key battles the ABS industry lost to regulators this year.

The STS criteria is part of the new Securitization Regulation, which has to be complied with at the start of next year. And with technical and implementation standards still awaiting approval by the European Commission, issuers and investors alike are eager to be ready as soon as possible.

Without that label, the investments lose their ‘high quality liquid asset’ designation which hurts bank’s liquidity ratios. Additionally, only STS bonds are eligible for lower capital charges.

But the rising cost of getting ABS deals done, which seems to have caught participants off-guard, is not yet threatening to shut off supply.

Obvion’s Storm RMBS, which four months ago was printing triple-A bonds at 14bp over Euribor, last week was priced at 28bp, closer to levels seen two years ago.

Similarly, Belmont Green’s Tower Bridge Funding buy-to-let (BTL) RMBS deal saw triple-A investors demanding 120bp, a third more than the previous deal in April, with half of the order book represented by banks and marketing helped by a lead order of £250m.

And when demand has faltered at home, bank originated UK Prime RMBS deals have sought the better reception on offer from US fund investors for dollar denominated tranches, a route followed by Lloyds, Clydesdale, Santander and recently Virgin Money.

BTL RMBS, CMBS and CLOs have ramped up the supply this year, resulting in euro ABS new issue roughly 25% ahead compared to last year. The tally so far is gross issuance of €67bn, according to Morgan Stanley data.

The bank is now optimistic that supply will be stronger and has upped its predictions for euro ABS issuance to €85bn-€90bn. UK RMBS, auto ABS and the continually revving CLO engine, they say, are likely to drive that increase.

The market’s oversupply of bonds this year has also been touted by observers as a reason for spread widening, and coupled with the diminished demand backstop from the European Central Bank’s Asset Backed Securities Purchase Programme (ABSPP), which now holds €27.2bn in ABS paper, the markers for the rest of the year point to funding costs increasing rather than diminishing.

And that may present some of the best buying opportunities all year. If the market continues as it has recently, investors will be playing with a better hand and able to demand better terms.

Funds may be the main beneficiaries, but banks can also piggy back by earning the same return as a few months ago, but with lower ticket sizes and hence less capital allocated. 

And with no burning credit concerns on the horizon, staying invested looks to be the smart play.

  • By Asad Ali
  • 11 Sep 2018

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 163,028.47 711 8.04%
2 Citi 160,005.15 642 7.90%
3 Bank of America Merrill Lynch 132,268.74 528 6.53%
4 Barclays 127,185.71 494 6.28%
5 HSBC 106,407.22 534 5.25%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 12,912.95 35 6.60%
2 BNP Paribas 12,334.48 61 6.31%
3 UniCredit 11,196.47 58 5.73%
4 Citi 9,580.75 37 4.90%
5 Deutsche Bank 8,953.95 35 4.58%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Morgan Stanley 5,578.64 26 10.66%
2 JPMorgan 4,866.13 28 9.30%
3 Goldman Sachs 4,404.70 21 8.41%
4 Citi 3,774.39 24 7.21%
5 UBS 3,602.23 16 6.88%