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Remember subprime? It's back, thanks to yield-chasing
Until recently, the subprime assets that sat on banks' balance sheets, unsold and unloved, were dubbed 'toxic'. But higher risk deals are returning
The increasingly intense search for yield among investors has finally alerted ABS (asset-backed securities) issuers to the possibility of structuring and selling deals backed by what were only recently termed toxic assets — assets that have been sitting on banks’ balance sheets, unsold, since the beginning of the crisis in 2007.
Following last week’s securitization of Spanish small and medium sized entity assets, deals backed by higher risk Irish and Italian assets emerged this week, along with a UK non-conforming RMBS in which 40% of the pool was backed by delinquent loans.
While investors have shown a growing willingness to move down the credit curve in the ABS secondary market, they had resisted these higher risk assets in the primary market. New issue supply so far this year has been dominated by prime asset classes out of core Europe.
But recently, this pre-eminence of top quality assets has begun to weaken. Spain’s Cajamar Caja Rural whetted investors’ appetite a couple of weeks ago with a securitization of SME loans — the first peripheral ABS in the primary market since the first half of 2012.
Far from being a one-off, Cajamar’s deal, which was arranged and led by JP Morgan, has been followed up by an eclectic trio of trades this week: an Italian consumer loan ABS called Monviso 2013, arranged by Crédit Agricole; an Irish consumer loan ABS backed by a portfolio originated by Permanent TSB and now owned by Deutsche Bank; and a securitization of legacy UK non-conforming mortgages, Virgil Mortgage No1, arranged by Natixis.
CASH ON THE SIDELINES
"Everyone is chasing yield as there is still an abundance of cash on the sidelines and there’s no supply coming out of the primary market," said one ABS trader in London.
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UK non-conforming RMBS, peripheral bonds — particularly from Spanish and Italian mezzanine tranches — and CMBS have been the main beneficiaries of the hunt for yield. The opportunity to buy high yielding paper from a core jurisdiction has driven investors without mandates for peripheral Europe towards non-conforming RMBS.
"UK non-conforming RMBS has definitely got a bid," said Janssen. "A lot of names have very high built-in credit enhancement levels, and with interest rates as low as they are you’re not going to see defaults. Reserve funds have replenished and excess spread is healthy. The market is cheap for the risk investors are taking."
"People have to look at this type of paper because there’s no prime market," added Janssen. "The investment grade part of the non-conforming market has almost become the new prime mezz market, because apart from the odd sub-one year bond there’s almost nothing left in the prime mezz space away from peripheral jurisdictions."
One ABS trader said prime RMBS was still a much more liquid product, but investors were now beginning to view non-conforming paper as high yield product rather than distressed product.
This change has given real money accounts the confidence to buy a broader range of non-conforming paper, lower down the capital stack and with less regard for ratings, he added.
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