Where are all the securitizations?
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Where are all the securitizations?

Conditions seem perfect but there's nothing in the visible primary market pipeline

The Cupboard Still Bare  - British Political Posters, c1905-c1910

The European ABS primary market is curiously quiet, yet conditions for issuers could hardly be better. All the early deals this year were heavily oversubscribed and achieved tight pricing. The lack of new issue activity is more puzzling still, given favourable conditions in the second half of the year are by no means guaranteed.

It’s not hard to find reminders that almost half the world will vote this year, including the US and the UK. For other reasons too, the chances of macroeconomic, geopolitical or other exogenous factors throwing up another period of volatility are high.

As such, the fast start was understandable, but now there are no deals in the visible primary pipeline and supply is hardly set to take off.

Such was the rush at the start of the year that Lloyds opened books on Permanent 2024-1 before New Year. It was the strongest January for ABS, RMBS and CLOs since the 2008 financial crisis, according to a recent piece of Bank of America research.

Despite that, demand appears to have remained healthy. The most recent deal in euros, LocalTapiola’s €450.5m Tommi 5, hit a peak coverage ratio of 2.1. That’s nearly €500m of demand for ‘simple, transparent and standardised’ paper going unfulfilled.

Coming near the start of an issuance window is often advantageous. The chance has gone in sterling, but in euros, where there have only been five deals so far this year, the opportunity remains.

It is all the more imperative to move quickly considering what may be coming later in the quarter. A large German auto deal and a large euro consumer deal are both likely and would take big bites out of demand.

Looking back to September and October, deal execution slowed and more esoteric collateral suffered in some cases, once the market became busy. Some issuers which have priced deals already this year said that they benefitted from the market being so quiet.

Perhaps what is keeping others back is simply that they cannot get deals ready in time. Nationwide launched its ‘stock and drop’ plan to address that very problem. It retained a three tranche deal before the start of the year, planning to ‘drop’ the tranches at opportune moments.

This would appear to be one such moment, but nothing has ‘dropped’ so far.

Another factor behind the inactivity may simply be that issuers have lower needs this year. Origination has generally become more difficult because of rising interest rates, so overall volumes will likely drop this year in some sectors that have previously provided regular issuance.

UK buy-to-let is one such sector. Returning bank issuance shelves may supply a greater quantity of RMBS paper overall,but the deal count may fall if the regular £300m-£500m non-bank deals drop away. In that market investors have shown a willingness to buy more esoteric paper at compelling levels, such as Enra’s recent mixed charge deal.

That deal reached a spread of 112bp over Sonia, a strong print by 2023’s standards, even compared to pure buy-to-let. More impressively that was done with over 80% of orders coming from asset managers, as banks tend to avoid deals with second charge loans.

There’s no guarantee it will last. One syndicate banker has already predicted mezzanine spreads will go “sideways” for the next couple of weeks, after investors showed price sensitivity on both the Enra and LocalTapiola deals.

So, for issuers who can cobble together enough collateral for a deal at the speed required, why wait?

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