A new collateralized debt obligation of European residential mortgage-backed securities by NJR Invest is raising eyebrows among market participants in the region. Officials said the initial EUR10 million ($12.9 million) issue from the Belgium-based manager, the first CDO of ABS since the 2008 financial crisis, could reignite interest in the dormant European CDO sector if investors could be sourced.
Brussels-based NJR has put together the initial note issue, known as NJR Finance 2012-1, as part of larger CDO program with a potential size of about EUR450 million ($583.3 million). The underlying collateral is a pool of prime AAA-rated euro-denominated U.K., Dutch and Italian RMBS eligible for the European Central Bank’s repo funding program.
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John Buckens
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John Buckens, founding-managing partner at NJR, said the EUR10 million ($12.9 million) of notes have not yet been sold into the market, and instead were placed with parent firm BRED-Banque Populaire. Buckens described the CDO as an alternative source of balance sheet funding for NJR, which has a buy-and-hold strategy investing in prime AAA-rated European RMBS. NJR has about EUR900 million ($1.16 billion) of assets in total.
“This is a tool we are setting up should we need it, and it’s being done to potentially place in the market, if and when there is demand at attractive levels,” Buckens told SI Tuesday. “We’ve set the rate at 140 basis points over three-month EURIBOR—only once levels break this level will it make sense to sell into the market.”
Standard & Poor’s rated the trade AAA. According to an S&P memo, the cash raised from the note issue is used by the NJR Finance, the issuer, to buy the RMBS from NJR Invest, the arranger, under a repurchase agreement. The issuer then enters into a swap agreement with BRED-Banque Populaire, with the issuer paying interest from the assets in return for an equal amount from the swap counterparty plus issuer expenses.
Market officials in London described it as “an interesting trade,” with one London-based senior ABS strategist predicting renewed appetite in the dormant market “if there is external interest.” The strategist added, “It is very interesting from the point of view of securitization markets in Europe,” but urged caution, since holding RMBS is far less costly for investors than holding CDOs under new risk capital requirements.
Buckens also said the “very high quality” of the underlying assets would boost its appeal to potential investors. “Pre-crisis CDOs were funding different types of assets. This is more of a defensive, conservative CDO.”
He added, “You could argue that buying this CDO is less risky than buying the underlying assets, which are themselves the prime RMBS people are trying to get their hands on, because you have diversification and you have 25% overcollateralization.”