Research analysts are divided as to whether spreads will tighten further in advance of Basel II, the new regulatory capital framework due to be implemented in 2007.
Ron Thompson, head of asset-backed and structured research at Royal Bank of Scotland in London, expects further tightening based on increased demand from bank investors once new regulations come into force. Banks constitute 50-60% of the investor base in Europe (and 70-80% in Asia), versus just 20% in the U.S. Further, Thompson expects positive technicals via less issuance on the back of changing regulatory capital requirements under Basel II.
In contrast, Swen Nicolaus, v.p in European securitization research at Deutsche Bank, believes most of the impact of Basel II is already priced in. Howard Esaki, executive director in securitization research at Morgan Stanley in London, agrees. "There is still so much uncertainty regarding the actual implementation of Basel II that it is very difficult to put it into a recommendation."
But analysts do agree collateralized debt obligations of loans to small-and-medium sized enterprises (SMEs) offer relative value. "The market is expecting a raft of issuance toward the end of the year and we see good value in what should be fairly granular, diversified portfolios," said RBS's Thompson. Edward Reardon, v.p. and head of ABS research at J.P. Morgan, added triple-As, in particular of short maturity, are another attractive investment.
Overall, analysts still think asset-backeds represent good value against corporates and recommend overweight the former. "We expect to see a widening in corporate spreads, but to have less volatility in ABS," predicted Morgan Stanley's Esaki.