The European securitization market kicked off 2022 full of optimism and abuzz with activity. By January 21, six UK RMBS deals had already been completed. With more in the pipeline and the CLO market soon expected to get started in style, 2022 was shaping up to be a big year.
But then came the Fed. And then came Russia.
Fears that the US Federal Reserve might raise interest rates faster than expected kicked off a nervy few days. Then, tensions on the border between Ukraine and Russia intensified. Suddenly, European ABS went quiet again.
Some deals got caught out in the cold. The senior notes of the Polaris 2022-1 UK non-conforming RMBS deal were priced 7bp-8bp wide of similar deals from the week before. The first week of February is not expected to see business return.
But despite these bumps in the road, the underlying confidence within the market has remained strong. The consensus is that, once those jolts are behind it, European ABS will continue to have a good year.
After all, the ABS market is far from alone in getting jittery over the Fed's hawkish turn and the whims of Russian president Vladimir Putin.
There are other uncertainties, too, about what the next few months hold, such as the course of the pandemic. But this is also not peculiar to the European ABS market.
In fact, European ABS could be just the place for risk averse investors to shelter from the storm clouds.
Securitizations tend to be short-dated, carrying less mark-to-market risks for investors, making them appealing as a safe haven during times of crisis. The assets on which the bonds are secured, meanwhile, detach their ratings from those of their issuers, offering rating stability, which, again, is useful in a volatile credit environment.
Perhaps most importantly, ABS is a floating-rate product, providing a natural hedge for investors against further rate rises.
As a bonus, ABS issuance funds the real economy and helps keeps credit flowing, so could be an attractive purchase for the European Central Bank as it looks to keep things ticking over, even as it tapers its overall quantitative easing programme.
European ABS is not a market without its problems, however.
It is often described as having the most stringent regulations of all the capital markets, making it off-putting and expensive to new investors. The assets are also not as liquid as similar triple-A rated securities.
ABS bonds may even still suffer from something of an image problem, with visions of bankers flooding out of Lehman Brothers’ Canary Wharf offices carrying cardboard boxes still etched in the minds of many.
It would be only fair for investors who see past those drawbacks to be rewarded for their adventurous spirit with a pick up in spread.
As long as that is there, new investors should see this year as a good opportunity to participate in what is a maturing market, while taking shelter from what could be a stormy year ahead.