European ABS Pricing and Sectors
The European ABS market has remained mostly quiet over the last four weeks. We have seen spreads slightly tighten, despite the end of the ECB’s rescue program and the ongoing sovereign debt crisis. This movement was helped by a sudden increase of buying activity at the beginning of this week, especially on the most senior tranches of UK non-conforming RMBS, such as Southern Pacific, as well as some CMBS, such as Titan Europe 2007-1.
Granite cash prices have also improved. The AAA, AA, A and BBB bonds, which were trading four weeks ago at 91.7, 73.5, 62 and 42, respectively, now trade at 92.3, 74.25, 63 and 43.
In term of deals being called, we are now pricing all Redevco securities at par. This call seems to be a surprise for investors, especially for recent buyers, as only two weeks ago the most senior tranche was still being offered at 87.
Moreover, the announcement that Kensington will re-enter the RMBS market seems to have brought a bit more of optimism to residential mortgage securities remaining on the secondary market, since many investors and traders are expecting their cash price to rise.
Regarding the primary market, it seems that Cars Alliance Auto Loan Germany 2010-1 was successful. We now see it traded at 112 basis points, which is 3 basis points tighter than at issuance and with a weighted average life of 1.8 years.
Top 5 Price Movers
Most of the improvers are dominated by Auto ABS
European Total Return
None of our total return curves have been affected by a major drop or improvement.
European CDS of ABS
With the synthetic market remaining stable and the cash market getting tighter, the negative basis is slightly decreasing. Nothing major has been reported on this market.
Primary Market and Rating Actions
As mentioned earlier the big attraction of July 2010 was the public placement of the last RCI deal, but other deals were also placed or partially placed, including Saecure 7 and Tesco Property Finance 3.
Most of the rating actions are still downgrades but we are definitely seeing a growing number of upgrades especially from Portugal.
Economic Data
The Nationwide year-on-year House Price Index is now showing a rise of 8.7% as the month-on-month House Price Index reached 0.1% in June 2010. Interestingly, there was a massive drop in term of year-on-year growth compared to May 2010 when the index was at 9.8%. This is due to poor month-on-month growth of the housing market since the beginning of 2010 compared to 2009.
With growth of 6.3% the Halifax year-on-year House Price Index still trails the Nationwide index, as there was a decrease of 0.6% for the Halifax month-on-month index in June.
In June, the Markit Construction PMI Index increased to 58.4. The commercial construction sub index is at 54.2; while the housing construction sub index showed a massive improvement to 62.8, which is the highest improvement since 2007.
Finally, according to the BoE Monetary and Financial Statistics report, the total net monthly lending secured on dwelling for May 2010 was £11.4 billion while the seasonally adjusted figure reached £12.3billion, which are both show signs of improvement compared to April 2010.
ABS Performance Highlight: CMBS
Over the past two weeks, CMBS deals have seen a series of negative rating actions. Moreover, due to the challenges in refinancing or selling the properties, an increasing number of borrowers are not able to meet their financial obligation on the loans. The application of covenants and triggers has resulted in additional loans transferred to special servicing. Since a considerable number of loans will mature in the next couple of years, CMBS investors are concerned that the current state of the European economy and the widespread uncertainty in the financial market could worsen the performance of the CMBS transactions.
In the table below, we report some significant performance indicators on six transactions that have been recently downgraded or put into special servicing. In order to underline the impact of the macroeconomic conditions on the CMBS performances, we include three German transactions, a UK deal and two cross-border European CMBS.
In terms of CMBS performance monitoring, the increase in the LTV ratio one of the most important indicators. From the tables above, we can see that, among the six deals, the LTV ratio has increased for five of the six transactions analysed over the last year. Except for GECO series 2002, the LTV ratio for the other five CMBS is higher than 70%, reaching 81.55% for Indus (Eclipse 2007-1) plc and 100.39% for Talisman 3 Finance Plc. However, the ICR values for GECO (3.95) series 2002 and Talisman 3 Finance Plc (3.03) suggest that these transactions are able to generate enough cash to cover payments. Talisman 3 Finance Plc seems to generate also enough income to meet the financial obligations, reporting a DSCR value of 2.53.
Going into details, the German transactions have been influenced by the recent economic turmoil. Despite the stable performance of the deal, the senior notes of GECO series 2002 have been downgraded from AAA to AA+ by Standard & Poor’s in order to reflect the downgrade of the public sector pfandbriefe that back the CMBS transaction. The decrease of the property value and the number of defaulted loans has contributed to the deterioration of CMBS performance. The market value of the Dusseldorf Loan in the deal Cornerstone Titan 2007-1 has hit the default trigger under the facility agreement and the loan has been transferred to special servicing. All the notes of Titan Europe 2006-1 plc have been downgraded by Moody’s because of the devaluation of the property of two defaulted loans.
A broader look at the European properties points out how the distress of the economy in Southern Europe has negatively influenced the cross-border European transactions. Referring to the two cross-border European deals included in this analysis, Epic (Drummond) Limited A Notes have been downgraded from Aaa to Aa3 by Moody’s, following a loss in the value of the properties exposed to Greece, Spain and Portugal. Talisman 3 junior classes have been downgraded by Standard and Poor’s, due to the failure of repaying the obligation on the two main loans and an LTV ratio over 100% over the last three quarters.
On the other hand, in the UK, the improvement in economic conditions seems to have improved the environment for loan refinancing, leading to a possible positive outlook. For example, the loan Snowhill of Indus (Eclipse 2007-1) plc is currently in special servicing, but the special servicer has reported that the borrower of the loan Snowhill has received a final term sheet for refinancing the loan and there seems to be enough funds to repay the loan.
Ultimately, the uncertainty related to loan refinancing and the macroeconomic conditions are contributing to increase the concern among CMBS investors both in terms of future performance and price volatility.
This market commentary was written by Philippe Pagnotta, Roman Kalyuzhny and Alessandra Perosa, ABS analysts at Markit.
Have questions or comments about this piece? E-mail them to markit@iinews.com.