A summer slump in securitization is now well under way. The US market may never really stop, but it is certainly suffering, with spreads widening and many triple-As over 200bp in the primary. As for Europe, the heat is getting to issuers and investors. Just one deal was issued this week, and it was entirely retained.
European analysts have been lining up to tell GlobalCapital that market confidence had all but disappeared. The Fed’s 75bp rate rise, coupled with the ECB’s impromptu meeting last week, had “piled on more negative sentiment”, according to Rabobank’s research team. And a ratings analyst added that investors know there’s little point in buying today as everything will creep wider tomorrow.
The sense is we’ll probably be waiting until September for any decent issuance to return.
The US is not exempt from the market turmoil either. But it will take something stronger to stop issuers. Illustrating the point, Sunnova has issued its second solar ABS of 2022, Sunnova Sol 2022-1. The deal was 95bp wide of the previous Sunnova Sol deal, but this did not faze the solar energy firm.
“Obviously, the cost of debt has gone up, but that was expected, and we have been offsetting this increase in our cost of capital by increasing the pricing of our services,” a Sunnova spokesperson told us.
That price is being passed onto customers of course. But while oil and gas prices soar, it is palatable for solar energy costs to nudge higher.
Opportunity knocks
It’s perhaps time to recall the words of Chinese general and philosopher Sun-Tzu: “In the midst of chaos, there is also opportunity”. And so it is for US investors.
Philip Armstrong, Invesco’s senior portfolio manager of structured investments, told GlobalCapital that “there are opportunities to buy bonds at incredibly cheap levels”. The challenge for investors was whether they could withstand a bit of short-term volatility and the threat of spreads — at least temporarily — moving wider still.
Into the chillier climes of Canada, Alberta Investment Management Corporation (AIMCo) is also spotting an opportunity. The institutional investor, which has $168m of assets under management, has nabbed US bank Jefferies’ European head of securitized markets, Craig Tipping, to launch its global structured credit team. Tipping will be head of structured credit for AIMCo, which we understand plans to become a “meaningful player” in both the US and European securitization markets.
Also moving seats will be BNP Paribas’ head of European ABS and CLO trading, Mehdi Kashani, who has left to join specialist asset manager Arini after a six-year stint at GlobalCapital’s ABS/RMBS Trading House of the Year. Michael Htun is stepping up as BNPP’s interim head of ABS and CLO trading in Kashani’s place.
The world of rating agencies is perhaps not known for its juicy gossip, but this week has provided an interesting development thanks to Scope Ratings, the Berlin-based challenger firm. The European Commission has mandated Scope to rate its EU debt instruments in what sources believe is the first step towards becoming ECB eligible. Numerous sources told GlobalCapital that Scope is now under consideration from the ECB, with a decision expected in the coming months.
If that decision were to go Scope’s way, it could cause a tectonic shift in the ratings landscape in Europe and the world. As Scope’s COO Guillaume Jolivet said himself: “We don’t aspire to be a niche market player. We are establishing a global brand.”
Positive news for Scope, but I’m afraid we’re returning to the summer pessimism to wrap up. GlobalCapital reported there is now a fear of maturity extension risk in UK non-conforming RMBS, as step-up margins are likely to be lower than the cost of funding in the public market with today’s conditions so tough. A source suggested that if RMBS spreads go 30bp-50bp wider, extension risk would become a material factor, especially in the pricing of mezzanine bonds where the impact could prove “severe”.