European asset-backed and mortgage-backed securities continued to be placed into the market over the past year despite twin challenges of sustained market turbulence and tighter regulatory restrictions. Market participants have highlighted the latest draft of the EU’s Solvency II regulations, which place even tougher capital charges on insurance and pension fund investors’ holdings of ABS companies, potentially driving them out of the already-depleted European securitization investor base.
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Mark Hale
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Estimates of total European issuance volume for 2011 vary, but the number of deals placed with investors is reckoned to be near the EUR80 billion ($104.5 billion) level. And while there has been disappointment that volumes did not reach the levels hoped for during the first half of the year, the number of deals getting away has been impressive, according to
Mark Hale, chief investment officer at
Prytania Investment Advisors.
Recent Citigroup research pointed to securitization becoming an increasingly larger part of European banks’ funding arsenal during 2011. Placed securitization surged from 2% of the region’s bank capital market funding, which also includes covered bonds and senior unsecured bank debt, in January last year, to 29% by October and November.
On the flipside, the continuing sovereign debt crisis gripping the euro zone saw a number of residential mortgage- and asset-backed securities deals being put on ice during the second half of the year.
Yet despite pressures, core markets such as U.K. and Dutch RMBS and German autos stayed resilient. In the U.K., Skipton Building Society priced its debut RMBS Darrowby at 150 basis points in March, while other first-time entrants to the market included Yorkshire Building Society with its Brass trade in May and Principality Building Society with the Friar No. 1 RMBS in August. Meanwhile, prolific pre-crash securitizers Northern Rock and Paragon Mortgages also made RMBS market comebacks. Sizeable dollar-denominated tranches of U.K. deals in particular have become a mainstay of the market, with issuers keen to tap U.S. investors’ appetite for attractive yields found across the Atlantic.
In June, Deutsche Bank rolled out the £302.34 million ($469.1 million) DECO 2011-CSPK, which securitized a single loan on a business park in Chiswick, west London. It was hoped the deal would signify a thawing out of the frozen European CMBS mart, yet the deal remains the only new issue post-crisis CMBS in the region to date, despite rumours of multi-loan deals during the fall.
“Realistically, with all the negatives around, the fact we saw as much new issuance and from as diverse a section of issuers as we did, including some new names coming to the market, it’s been very impressive,” Hale told SI. “The fact ABS has remained open throughout extreme stress, price volatility, problems in equities and debt markets further illustrates why we believe the virtues of relative stability and relative access remain a powerful and ongoing argument for securitization.”
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Caroline Phillips
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In CMBS, with fewer banks returning to commercial real estate funding, lending margins have increased, with those banks that remain in the market having a more expensive funding base, according to
Caroline Philips, managing director and head of European structured debt at
Eurohypo. Philips said if loan margins continue to rise, parity between lending margins and CMBS spreads will be reached. “At some point they will hit a level where CMBS becomes economically viable again,” Philips told SI.
“It’s tough to say where margins are given there are low volumes of deals, but a prime senior loan that a few months ago would have priced at 225 bps is now at the 275 or 300 level. It’s a generalization, but that’s broadly where it is,” Philips explained. She noted that for non-prime real estate assets there are even fewer deals happening. “Were there deals being done, the margins would be even higher.”
Deutsche Bank is already said to be preparing a new £210 million ($325.9 million) U.K. CMBS backed by a single loan on the Westfield Merry Hill shopping mall near Birmingham. That deal is one of two new issues reckoned to be in the works for the first quarter of the year, with industry lawyers recently forecasting a “slow steady drip feed” of new deals in 2012.
But Philips urged caution on any prospect of a steady flow of new deals. “It will be quiet,” she said. “Most people are focused on restructurings on existing securitized deals. What liquidity there is in the bank market is focused on the prime-prime end, which of course is where investors would like to do CMBS.”
Christian Aufsatz, asset-securities analyst at Barclays Capital in London, said the prospect for new trades hinges in part on the health of commercial real estate. “I don’t think we will see a flurry of CMBS issuance in 2012,” Aufsatz told SI. “The outlook for the property market is not good.”
“Securitization is not treated well under regulation—for many investors it’s either prohibitive to buy securitization or simply the capital charges are too high. Most of the regulations promote buying loan portfolios or buying covered bonds,” Aufsatz said of regulatory hurdles confronting the CMBS market.
He noted investors prefer to have direct control over loans and potential future workouts, as opposed to CMBS where investors only have indirect control. “If an investor wanted to take on commercial real estate exposure, most of them would prefer to either buy whole loans or originate loans.”
| 2011 Top 10 European ABS Deals |
| Deal Pricing Date |
Deal Total Face Value ($ millions) |
Issuer |
Issuer Parent |
| 4/21/2011 |
2,102 |
Motor Finance 2011-1 |
Banco Santander SA |
| 7/21/2011 |
2,034 |
SANDOWN GOLD 2011-1 plc |
Lloyds Banking Group plc |
| 3/8/2011 |
1,918 |
Bilkreditt 1 Ltd |
Banco Santander SA |
| 9/22/2011 |
1,773 |
Gracechurch Card Programme Funding plc (Series 2011-4) |
Barclays plc |
| 7/5/2011 |
1,525 |
AUTO ABS FCT Compartiment 2011-1 |
PSA Peugeot Citroen |
| 2/7/2011 |
1,475 |
Gracechurch Card Programme Funding plc (Series 2011-1) |
Barclays plc |
| 3/31/2011 |
1,340 |
Volkswagen Car Lease (VCL) No 13 SA |
Porsche Automobil Holding SE |
| 11/24/2011 |
1,261 |
Cars Alliance Auto Loans Germany 2011-1 |
Renault SA |
| 3/23/2011 |
1,245 |
Bumper 2 - 2011 |
LeasePlan Corp NV |
| 10/20/2011 |
1,188 |
FCT Ginkgo Compartment Sales Finance 2011-1 |
Crédit Agricole SA |
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| 2011 Top 10 European MBS Deals |
| Deal Pricing Date |
Deal Total Face Value ($ millions) |
Issuer |
Issuer Parent |
| 10/13/2011 |
19,957 |
Silverstone Master Issuer plc Series 2011-1 |
Nationwide Building Society |
| 4/8/2011 |
7,419 |
Arran Residential Mortgages Funding 2011-1 plc |
Royal Bank of Scotland Group plc |
| 5/18/2011 |
6,085 |
Fosse Master Issuer plc Series 2011-1 |
Banco Santander SA |
| 4/14/2011 |
5,982 |
Permanent Master Issuer plc 2011 - 1 |
Lloyds Banking Group plc |
| 10/10/2011 |
5,507 |
Arran Residential Mortgages Funding 2011-2 plc |
Royal Bank of Scotland Group plc |
| 11/10/2011 |
4,962 |
Gracechurch Mortgage Financing plc 2011-1 |
Barclays plc |
| 10/26/2011 |
4,919 |
Permanent Master Issuer plc 2011-2 |
Lloyds Banking Group plc |
| 7/21/2011 |
3,924 |
Arkle Master Issuer plc 2011-1 |
Lloyds Banking Group plc |
| 9/14/2011 |
3,784 |
Holmes Master Issuer plc Series 2011-3 |
Banco Santander SA |
| 2/2/2011 |
3,304 |
Holmes Master Issuer Plc Series 2011-1 |
Banco Santander SA |
| Source: Dealogic |