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A Good Price Point For European ABS

8 March 2019 by Ben Hayward

We wrote a blog a month ago, “January: the Month of ABS-tinence”, about the level of new issuance in the European ABS market, and the slightly counter-intuitive impact it was having.

Essentially while other bond and loan markets were rallying hard after the Fed switched to a more dovish outlook, in line with market sentiment, the ABS market did not see the same effect. We attributed this to the lack of new issue supply. It felt that, after a tough final 6 weeks of 2018, the market needed to see a good-sized deal print in the market, one that issued more than just AAAs, and one that might appeal to more than just CLO investors.

Why did it need this? To illustrate the size of investor risk appetite, and to give a confirmation of the direction of spreads.

That deal finally happened yesterday, when NorthView Group’s £535mm Finsbury Square 2019-1 priced. It’s a UK non-prime residential mortgage-backed securitisation. The deal sold bonds from AAA to BBB, and one of the things we think is positive about this deal is the level of appetite investors showed in the deal. Below we have listed how oversubscribed each tranche was

Class A (AAA rated)         2.4x

Class B (AA rated)            2.6x

Class C (A rated)               2.7x

Class D (BBB rated)       6.5x

The book was built over a couple of days, and priced at the tighter end of price talk, as you would expect, with so much demand for bonds the issuer doesn’t need to pay the higher end of pricing. While they could have potentially looked to reduce the cost of debt even more, they have chosen to be pretty investor-friendly and do the deal in that initial range – the one indicated to investors when they start to do the credit work on the transaction.  It can be very frustrating for investors if you do the work, and the pricing process is either unclear, or you feel like you have been mislead by overly generous initial price talk!

In the meantime, last week a £800mm portfolio was sold in the secondary market. The sale generated substantial interest, and the prices achieved were above where the market expected. For a portfolio that was 100% UK risk this again is a good sign for the direction of prices.

So we now have a number of good indicators of investor appetite, both in primary and secondary. Perhaps the lag in ABS pricing relative to other parts of fixed income will tighten going forward.

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