European ABS Pricing and Sectors
The volatility seen in broader credit markets has not been reflected in European ABS. This comes despite iTraxx Senior Financials Index seeing a bumpy ride from the end of July, tightening on the back of stress test results, only to widen to pre-stress test levels two weeks later. This weeks successful Irish bond auction has brought some relief, leading to a 7 bps tightening. In ABS, however, pricing across most asset classes and jurisdictions has remained range-bound, with the exception of some of the junior securities of Spanish and Portuguese deals where we have seen prepayment expectations lowered, leading to higher WALs and lower prices.
The hiatus typical in the European ABS market at this time of year continued. The end of July and beginning of August have seen subdued activity levels. Senior non-conforming RMBS & BTL (such as ESAIL & PARGN) and some CMBS (notably TITN 06-2 A and OPERA GER1 A) have attracted the most attention.
Cash pricing on Granite has seen further improvements in the observed bids quoted now at 93.1 for the AAA (up 0.8 pts from 4 weeks ago), at 75 for the AA (up 0.75 pts), at 64 for the A (up 1 point) and BBB up 1.5 to 2 points at 44.5 to 45. (The EUR tranches bid 0.5 points higher than the USD and GBP tranches.)
The aforementioned successful sale of Irish sovereign debt is unlikely to have the same sort of positive impact on Irish RMBS deals as was seen on the senior financials. Solvency concerns still abound in the Irish banking sector and the outlook on underlying deal performance is negative. Performance is expected to deteriorate further, with no end in sight, as tight credit conditions and fiscal austerity continue to put a strain on households, as further detailed in the performance update below.
Top 5 Price Movers
Improvement was generally seen in junior and mezzanine tranches of UK Prime RMBS, while Spanish securities dominate the largest deterioration.
|ABS Improvers (Source: Markit European ABS Pricing Service)|
|Fosse Master Issuer||2006-1||C4||GBP||458||-156.79||BBB||PRMBS||GBR|
|Fosse Master Issuer||2006-1||C3||EUR||458||-156.79||BBB||PRMBS||GBR|
|Granite Master Issuer||2007-2||1M1||USD||441||-155.75||A||PRMBS||GBR|
|ARENA 2004 II BV||2004-2||D||EUR||545||-149.41||BBB||RMBS||NLD|
|Arkle Master Issuer||2006-2||3C3||GBP||466||-147.37||BBB||PRMBS||GBR|
|ABS Deteriorators (Source: Markit European ABS Pricing Service)|
|CM Bancaja 1 Fondo||1||A||EUR||1,310||197.1||AAA||CDO||ESP|
|Fondo de Titul UCI 8||18||A||EUR||398||47.76||AAA||RMBS||ESP|
|BBVA 4 PYME Fondo||4||A2||EUR||534||34.25||AAA||SmallBus||ESP|
European Total Return
None of our total return curves have been affected by a major drop or improvement, except the Spanish ones.
European CDS of ABS
With the synthetic market remaining stable and the cash market getting tighter, the negative basis is slightly decreasing. Nothing major has been reported in this market.
|European CDS of ABS AAA (Source: Markit European CDS of ABS Service)|
|Arkle Master Issuer||2006-2||3A2||EUR||95||90||135||-45|
|Perm Master Issuer||2007-1||3A||EUR||130||100||155||-55|
|Gracechurch Mtg Fin||2007-1||3A2||EUR||110||95||140||-45|
|Holmes Master Issuer||2007-1||3A2||EUR||130||90||125||-35|
|Granite Master Issuer||2007-2||3A2||EUR||3.5%+50dm||1.8%+50dm||93.5||-3.60%|
Primary Market and Rating Actions
Second half of July saw a number of publicly placed deals, including two deals from Santander - the Fosse Master Issue of UK PRMBS and a non-captive Auto Loans issue. Retained primary issuance has continued unabated throughout August, but no public placements made it to the market since the beginning of the month.
|Primary Market(Source: Markit European ABS Performance)|
|Maestrale 3||Italian Lease ABS||A||AAA||160||1,208.10|
|Pontormo Mortgages Srl||Italian RMBS||A1||AAA||20||187.9|
|Douro Mortgages No. 5||Portuguese RMBS||A||20||1,099.00|
|Citadel 2010-II||Dutch RMBS||A||AAA||120||990.7|
|Belgian Lion SME I||Belgian SME CLO||A1||AAA||175||3,000.00|
|Atlantes Finace No. 3||Portuguese ABS||A||AAA||110||208.5|
|Foncaixa Hipotecario 11||Spanish RMBS||A||AAA||80||6,110.00|
|MBS Bancaja 7||Spanish RMBS||A||AAA||30||472.5|
|Pearl MBS 4||Dutch Prime RMBS||A||AAA||90||931|
|BBVA Empresas 4||Spanish SME CLO||A||AAA||30||1,700.00|
|Fosse Master Issuer 2010-3||UK Prime RMBS||A1||AAA||152||1,481.60|
|Fastnet Securities 8||Irish RMBS||A1||AAA||1.25%||483|
|SC Germany Auto 2010-1||German Auto Loan||A||AAA||105||567|
|The Great Rolling Stock Co.||UK Whole Business||BBB||295||358|
|Sandown Gold||UK SME CLO||A1A||AAA||175||417.7|
|Thames Water Utilties Cayman||UK Whole Business||B||BBB||285||656.4|
Rating action has been mixed with some credit improvement in older vintage UK NC RMBS resulting in a number of upgrades. Downgrades still dominated though, especially in the Greek and Spanish deals.
|Deals Affected by Rating Actions (Source: Markit European ABS Performance)|
|Bancaja 3 B||Spanish RMBS||Upgraded|
|Bankinter 7 C; 9 BP||Spanish RMBS||Upgraded|
|Cajamar Caja Rural B, C||Spanish RMBS||Upgraded|
|Driver Three B; Four B; Five B; Six B||German Auto Loans||Upgraded|
|Granite Mortgages 04-2 2B, 3B; 04-3 2M, 3M||UK Prime RMBS||Upgraded|
|Hipotebansa VIII B; IX B||Spanish RMBS||Upgraded|
|Paris Prime Comm Real Estate C||French CMBS||Upgraded|
|Residential Mortgage Securities 17 B1a, B1c||UK NC RMBS||Upgraded|
|Southern Pacific Securities 04-1 M; B||UK NC RMBS||Upgraded|
|Southern Pacific Securities 04-2 C1a, D1a; D1c, E||UK NC RMBS||Upgraded|
|White Tower 2006-3 B, C||UK CMBS||Upgraded|
|Aire Valley Mortgages 04-1 3Ca, 3C2, 3D1, 3D2||UK BTL||Downgraded|
|Aire Valley Mortgages 05-1 2C2; 06-1 1C2, 2C2||UK BTL||Downgraded|
|Anaptyxi 2006-1 A, B, C, D||Greek SME CLO||Downgraded|
|Andromeda Leasing I||Greek Lease ABS||Downgraded|
|Axia Finance A; II A; III A||Greek SME CLO||Downgraded|
|AYT Caja Granada Hipotecario I B, C, D||Spanish RMBS||Downgraded|
|Bancaja 9 B, C, D||Spanish RMBS||Downgraded|
|BBVA Consumo 3 A, B||Spain Consumer Loans||Downgraded|
|Celtic Res. Irish Mortgage Sec No. 12 A3, B, C||Irish RMBS||Downgraded|
|Compagnia Finanziaria 1 A, B, C, E1, E2, E3||Italian Consumer Loan||Downgraded|
|Daneion 2007-1 A||Greek Consumer Loan||Downgraded|
|DECO 11 A1B, A2, B, C; 12 A2, B, C, D, E, F||CMBS||Downgraded|
|ELOC 19 (Morpheus) E||UK CMBS||Downgraded|
|Epic (Brodie) A||UK CMBS||Downgraded|
|Epihiro A||Greek SME CLO||Downgraded|
|Estia Mortgage Finance II A||Greek RMBS||Downgraded|
|Estia Mortgage Finance II B, C; III B||Greek RMBS||Downgraded|
|European Loan Conduit 28 (Vulcan) E||UK CMBS||Downgraded|
|EuroProp (EMC VI) D, E, F||UK CMBS||Downgraded|
|Gaia Lease A||Greek Lease ABS||Downgraded|
|Gemini (Eclipse 2006-3) A, B||UK CMBS||Downgraded|
|Granite Mortgages 03-2 1C, 2C, 3C||UK Prime RMBS||Downgraded|
|Granite Mortgages 03-3 1C, 1M, 2C, 2M, 3C, 3M||UK Prime RMBS||Downgraded|
|Granite Mortgages 04-1 2C, 2M, 3C||UK Prime RMBS||Downgraded|
|Grifonas Finance No 1 A, B, C||Greek RMBS||Downgraded|
|Harvest CLO V||Leveraged Loan CLO||Downgraded|
|Hipocat 11 A2, A3, B||Spanish RMBS||Downgraded|
|IM Ceres 2 Cajamar E||Spanish SME CLO||Downgraded|
|IM Grupo Banco Popular Empresas 2||Spanish SME CLO||Downgraded|
|Irida 2009-1||Greek Lease||Downgraded|
|Katanalotika A||Greek Auto Loan||Downgraded|
|Kion Mortgage Finance A||Greek RMBS||Downgraded|
|MBS Bancaja 3 D; 4 B, C, D, E||Spanish RMBS||Downgraded|
|Portfolio GREEN German CMBS C, D, E||German CMBS||Downgraded|
|Provide-VR 2003-1 C, D, E||German RMBS||Downgraded|
|Provide-VR 2004-1 D||German RMBS||Downgraded|
|Rural Hipotecario IX B, C, D, E||Spanish RMBS||Downgraded|
|S-CORE 2007-1 A2, B, C, D, E||German SME CLO||Downgraded|
|TDA 24 A1, A2, B, C, D||Spanish RMBS||Downgraded|
|TDA Unicaja 1 D||Spanish RMBS||Downgraded|
|Themelion Mtg A, B, C; II A, B, C||Greek RMBS||Downgraded|
|Themelion Mtg III A, M, B, C; IV A, B, C||Greek RMBS||Downgraded|
|Titan Europe 2007-3 A1, A2||UK CMBS||Downgraded|
|TS Co mit One||German SME CLO||Downgraded|
|Uropa Securities 2007-01B A3A, A3B, A4A, A4B||UK NC RMBS||Downgraded|
|Whinestone Capital Mgmt B1, B2, B3, C1, C2, C3||UK Prime RMBS||Downgraded|
|White Tower 2006-3 E||UK CMBS||Downgraded|
Both house price indices continue to paint a picture of a stable housing market. Halifax came out with a 0.6% rise month-on-month, offsetting the previous months decline of the same magnitude. The year-on-year 3 months running average showed a 4.9% increase, which was down from Junes 6.3% figure. Nationwide is painting a broadly similar picture, with their index showing a monthly 0.5% decline, with the yearly growth rate also falling from 8.7% in June to 6.6% in July.
The Markit/CIPS Construction PMI continued to show month-on-month improvement, albeit at a slower rate, dropping over 4 points from 58.4 to 54.1. Most notably the Housing Activity sub-index slowed significantly, dropping almost 6 points, from 62.8 to 57, and reversing a growth trend observed since March of this year. The Commercial Activity sub-index also slowed half a point to 53.7, marking a third straight month on a downward trajectory.
Finally, the BoE Monetary and Financial Statistics report is showing a slight decline in the seasonally adjusted total net monthly lending secured on dwelling for June 2010, down to £10.99 billion from £11.4 billion in May. The non-seasonally adjusted figure continued rising, reaching £13.3 billion.
ABS Performance Highlight: Irish RMBS
Housing prices in Ireland continue to fall, dropping by 16% in June compared to one year ago and by 36% compared to the 2007 peak. The negative outlook on the Irish economy for the last quarter of 2010 and the expected rise of the unemployment rate to 13.8%, have led the consumer sentiment to decrease over the last few months. The KBC Ireland/ESRI index reached 66.2 last month, falling from 67.9 in June, pointing out peoples uncertainty about their finances and the labour market.
As a result, mortgages arrears are increasing and repayment rates are following a negative trend. 90+ day delinquencies have increased considerably from the first quarter of 2008, rising from 1.3% to 6.5%.
The worsening of the credit performance has been reflected also on the 360+ day delinquencies, which have risen by 2% compared to one year ago.
Prepayment rates are decreasing as well, dropping from 10% in the first quarter of 2008 to 4.8% in the second quarter of 2010. Last week, three classes of the deal Celtic Residential Mortgages Series 12 were downgraded by Moodys because of the deterioration of the collateral performance.
In terms of performance indicators, it should be mentioned that Irish prime RMBS transactions contain only a small number of properties which have been repossessed by the servicers, due to the length of the legal process. The repossession process could be further delayed by the increase of the moratorium for commencing legal proceedings on owner-occupied mortgages from 6 to 12 months.
Overall, the outlook for the last quarter of 2010 remains negative. Most of the transactions are approaching the expected maturity date in 2012 and the investor.
This market commentary was written by Philippe Pagnotta, Roman Kalyuzhny and Alessandra Perosa, ABS analysts at Markit.
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