Astonishing July demand shows appetite for mezz ABS

A consumer loan ABS issued last week by Consors Finanz, a fully-owned subsidiary of BNP Personal Finance, highlights the remarkable appetite investors are currently showing for mezzanine ABS bonds.

The deal, Noria 2024-DE1, is secured on a portfolio of €800m of German fixed rate amortising consumer loans and offered a full capital structure to investors – bonds rated AAA through single-B, plus equity. The mezz notes rated BBB to single-B were 8-10 times oversubscribed, allowing pricing at close to record tight levels with the BBBs issued at 165bp over Euribor and the BBs at 355bp over.

This level of demand is particularly remarkable for mid-July, when like other bond markets European ABS tends to witness the start of a summer slowdown in supply. However, given the record-breaking issuance levels European ABS has witnessed so far in 2024 (€75.7bn printed year-to-date) we are seeing issuers anticipating a busy second half of the year and coming to market early.

Given our expectation that rates will remain higher for longer, carry is likely to be a key critical driver of performance in the coming months and the yields available in ABS thus look attractive. Noria 2024-DE1’s BBB notes offered a yield of 5.25% in euros, comparing favourably to the yield 3.5% on the euro investment grade corporate bond index.

The transaction also demonstrates how bank issuers are increasingly accessing the ABS market, both for funding as central banks have stepped back from providing cheap financing, and for capital relief as they look to reduce their risk-weighted assets and optimise their balance sheets.

Banks returning to the traditional capital markets has been a clear trend of the past 18 months, and one we hope goes further. Bank-sponsored RMBS and ABS transactions were a much larger part of the overall European ABS market a decade ago, and seeing this activity returning post-quantitative easing is a very healthy sign. Deals from larger shelves such as Noria tend to trade well and offer good liquidity, so as investors we can only applaud the development.

As we look ahead, we expect the strong supply-demand technical environment in European ABS to continue, supporting stable spreads and presenting ongoing investment opportunities.