Europe’s largest asset-backed securities deal for almost a decade is a sign of the sector’s growing potential, say securitization bulls, despite broker dealers exiting the sector and a renewed tendency for covered bonds in the eurozone.
Investors flocked back to the market in secondary trading, say analysts, after delaying purchases in anticipation of the impact on spreads of a deal in early April that was widely expected, unusually large and ultimately oversubscribed.
US private equity firm Cerberus is retaining 5% of the £6.2 billion deal, called Towd Point. The transaction helped Cerberus refinance its £13 billion purchase in November of mortgages originated by nationalised UK lender Northern Rock, including £12 billion of loans previously in the Granite RMBS vehicle (Cerberus initially sold £3.3 billion of the portfolio to TSB Bank in November). Bank of America Merrill Lynch, Credit Suisse, Lloyds Bank, Morgan Stanley and Natixis led the issue.
It demonstrated not just the size of the European ABS investor base, say bankers, but also its increasingly cross-border character. “We saw a lot of international names buying in sterling to support Towd Point; that’s an increasing trend,” says Matt Cooke, managing director in the DCM Securitized products group at Lloyds.
Nationwide Building Society’s £1 billion-equivalent triple tranche deal in February, in which a dollar tranche accounted for 20% of the total, is further evidence of the market’s growing internationalization, says Cooke. Earlier this year, Virgin Money issued its first securitization with a dollar tranche, accounting for about a third of the deal. “This is important, as before the crisis in most of the large transactions by big master trusts, around 40% would have been sold in the US and around 30% in euros,” says Cooke.
After years of smaller and more parochial deals, it could take a year or two to re-educate foreign buyers in the European residential-mortgage backed securities market, but Cooke says US familiarity with European deals is growing again with each new transaction sold in dollars. Securitizations backed by UK prime collateral are also a good place for non-European buyers to start, he says, as the performance is more transparent and generally better across the cycle.
However, industry insiders warn Cerberus’ deal had some uncommon advantages, as investors were quite comfortable with the risk and eager to buy back in after the outstanding Granite notes were redeemed at par in December.
“The deal’s reception suggests there was pent-up demand for European securitizations, but it’s also an idiosyncratic situation; this was a well-seasoned portfolio,” says Alexander Batchvarov, international structured finance analyst at Bank of America Merrill Lynch in London.
Towd Point’s 63,000 borrowers have around 15 years left on the mortgage on average, and owe an average of £77,000, notes Douglas Charleston, portfolio manager at TwentyFour Asset Management. The deal’s three-year call date made hedging currency risk easier for non-sterling investors, he says.
Meanwhile, talk in the market is that a small number of Japanese investors filled much of the order book in a pre-placement. It is not the first time yield-starved Japanese buyers have looked beyond their liquidity-drenched home to European securitization, says one banker. But smaller or lower-yielding issuance might find it harder to tap Japanese institutions, which have a reputation for lengthy credit-approval processes.
Data from Dealogic shows European RMBS issuance more than doubled in 2015 to an equivalent of more than $31 billion, while RMBS issuance in the year to late April more than tripled year on year.
The ECB’s policies have been more successful in pushing down covered bond yields, making securitization relatively less attractive for eurozone issuers, Batchvarov says. Along with growth in Dutch whole-loan sales, the impact of Solvency II rules also makes bankers and issuers downbeat on securitization in the Netherlands, the biggest continental European securitization market. Covered bond issuance surpassed securitizations for the first time last year in the Netherlands, according to the Dutch central bank.
Batchvarov says the closure of European securitization trading desks, most recently at Credit Suisse in March, is triggering a vicious circle: lowering liquidity and discouraging issuance, which brings down liquidity further and prompts more banks to exit. But Cooke says other banks are entering or re-entering. Lloyds itself has managed third-party deals in the primary ABS market for less than four years, for example. “We’ve had the busiest first quarter we’ve ever had,” he says.
Cooke thinks international buyers could help the UK recovery jump to continental Europe, where Lloyds is originating deals. He hopes small and medium-sized enterprise securitizations will start to proliferate too. A deal for UK online marketplace lender Funding Circle, launched in April, could be another beginning. “If securitizations can facilitate funding for online platforms that originate good quality loans for SMEs, that’s very positive for the market,” says Lynn Maxwell, global head of securitization at HSBC.