Recent transactions suggest that the 144A three year dollar tranche could be the largest, as the European ABS primary market has come to lean more heavily on US buyers. Fully 51% of Barclays Bank’s Gracechurch Cards 2011-4 issue went to US accounts last week. The week before, US accounts took 48% of Santander UK’s Holmes 2011-3.
"I’d advise any issuer that has 144A documentation to go for it," said one ABS syndicate banker. "And I’d advise any issuer without 144A to start putting it in place."
Paul Vanner, ABS syndicate at Rabobank discussed the attractions of European paper for US investors at a recent EuroWeek roundtable. "You’re dealing with a homogenous set of buyers and they’ve got a lot of money to put to work at levels that they think are really, really cheap. It’s as simple as that," he said.
"Anybody that can get 144A in place and deal with the legal aspects to it will find it well worth doing. It gives you options."
Even issuers without 144A already in place are stepping up their marketing efforts in the US. "We haven’t made a decision to add 144A docs to our programme, but we went to our first ABS East last October and then Orlando in February and we’ve had lots of investor interest," said Max Bronzwaer, treasurer at Obvion, a Dutch mortgage provider.
Although 144A documentation and dollar denomination maximises the pool of US demand that issuers can tap, some issuers are finding a US bid with 144A euro issues or even Reg S trades.
FCE Bank’s Globaldrive auto ABS, which closed in June, was 144A euro-denominated, as was last week’s Gracechurch Cards. For US investors willing to swap into dollars, this can mean exceptionally cheap bonds relative to domestic products.
Gracechurch Cards came some 40bp inside bid side secondaries in euros. Swapped back into dollars, however, it came nearly 100bp wider than domestic credit card ABS.
"Most US investors prefer 144A dollars, as you’d expect, but we’ve seen interest in Reg S dollars and even Reg S euros," said Bronzwaer.
The 144A ‘nightmare’
He said the process of adding 144A documentation was not straightforward. "144A means much more disclosure, takes more time, and costs a lot more," he said. "We hear feedback from investment banks that arranged it using words like ‘extremely painful’, ‘excruciating’, and ‘nightmare’."
For Werner Groenendijk, head of asset based funding at ABN Amro, the decision is clearer for issuers wanting to attract US investors.
"144A is effectively essential," he said. "It takes some time, but it’s usual for larger players. ABN is historically the largest issuer in the Netherlands, with structures similar to the UK master trusts."
Bronzwaer said that there was still euro-denominated demand for Obvion - a Rabobank subsidiary whose Storm RMBS notes are generally the tightest in the market.
"It isn’t a case of saying ‘jolly good, let’s start’ in the US — we have other alternatives available," he said.
Delivering value
The US bid for European paper is driven by a fairly simple calculation — no supply of domestic private label RMBS, and levels that look exceptionally cheap compared with domestic agency paper. Performance also weighs in favour of European assets.
"The recourse lending in the UK and Dutch markets is a much sounder way of doing business," said John Kerschner, head of structured credit at Janus Capital, a Colorado-based investment firm. "Here, you can log straight on to YouWalkAway.com and it will explain how to do a strategic default. In the UK and the Netherlands, they’ll come after you. Not many people over here are cognisant of just how different that makes the markets."
ABN’s Groenendijk agreed. "The response in general is something like ‘wow’ when we explain the credit performance of the Dutch mortgage market. It’s so much better than the US investors are used to.
"There’s no private label supply in the US, but huge demand," he said. "The supply is in euros, and not many European issuers have crossed over into the 144A world. Meeting in the middle would make the market more efficient."
US fund managers, like many European real money buyers, use European ABS assets to boost yields — meaning they have little interest in the tightest assets.
Bronzwaer said most US investors were unwilling to give up spread for extra security provided by the NHG, a Dutch national mortgage guarantee scheme. Obvion issues off this platform under the Strong name, but has only sold private placements this year.
"If losses are 1bp-2bp instead of 3bp-4bp, who cares, given all the goodies like reserve account and excess spread to protect the investor that are in the typical Dutch RMBS structure?" he said. "It’s still extremely unlikely to hit any senior notes."
Even transactions from DSB, a Dutch bank that went bust in 2009, have experienced no losses on the senior note level, he noted.
Kerschner said his fund looks for good Dutch mezzanine paper. "Deals are performing incredibly well, and the risk-reward is great even pricing in the illiquidity," he said.
Liquidity remains the Achilles heel of the European market, at least for US investors. "There are few investors compared to the US, fewer people chasing bonds," said Kerschner. "Historically, the European market was all SIVs, banks and CDOs — now who is left?
"You have to be aware of overhang in bad banks. You can buy good bonds, but if they drop by five points because someone is dumping paper, what’s the good of that?"