The European ABS Market – A Week in Review

Bad news from the UK and Spain weighed on the European ABS market again last week.

UK mortgage approvals fell to a record low 36,000 in June from 41,000 in May, a Bank of England report showed. That is the lowest level since comparable data were first published in 1992. Meanwhile, news of possible downgrades of Assured Guaranty Ltd. and Financial Security Assurance Holdings Ltd. by Moody’s Investors Service stirred up fears that securities wrapped by the two insurers might also be downgraded. Moody’s also published a new methodology for rating Spanish RMBS that directly affected 13 deals issued by banks like Caixa Catalunya, Caja Espana and Caja de Ahorros y Monte de Piedad de Madrid (as shown below in one such bond).

In the US, Treasury Secretary Henry Paulson moved to encourage covered bonds as a new source of mortgage financing. As we know from experience in Europe, securitization through covered bonds might help strong financial institutions decrease their cost of debt, but it will not help those with weak balance sheets and poor credit quality. This new option for investors will not positively affect the ABS market in the US where investors have already become risk averse to ABS paper.

As the ECB implemented its repo plan earlier this year, we saw the Euribor rate react favourably. Following, and in opposition to the massive liquidity crisis of February and March, Euribor has increased at a limited rate.

For the third consecutive week, our analysis of the European ABS market’s top five biggest movers did not show any improvers.

In the primary market, it looks like the positive sentiment that last week’s public placement of Auto ABS Compartment 2008-1 brought with it into the market has faded. All of this week’s deals appear to have been retained, according to their pricing.

This week’s Aire Valley 2008-1 (Bradford & Bingley) priced at very tight levels compared to comparable bonds in the secondary market, leaving little doubt that these securities were retained.

(For further details about the current collateral performance of the Aire Valley Master Trust, please refer to Appendix 1.)

Negative headlines have driven spreads on UK prime, UK subprime and Spanish RMBS much wider recently. ABS traders have definitively decided that UK subprime RMBS will be the sector hurt the most by the credit crisis since the sector now trades much wider than Spanish RMBS, which itself now trades at levels near UK Prime RMBS. The days when people expected UK subprime RMBS to trade at the same levels and in the same direction as Spanish RMBS are over.

This week and next will be important for the European ABS market since both the Nationwide and Halifax house price indices will be published. Last month, the Nationwide index showed a small month-on-month loss while the Halifax index showed 2.0% declines. With the Nationwide benchmark decreasing now by 1.7% for July, there is no expectation of these indices to improve significantly soon. The real questions are how far will the indices’ declines extend and how big will the coming defaults be?

Appendix 1 - Collateral performance of the Aire Valley Master Trust (provided by Markit Euro ABS Performance)

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