Fed rates held: Goldilocks is in the building
The European ABS market is officially back in session after the summer break, with two of the busiest fortnights for issuance in over a decade and strong demand facilitating some blockbuster prints.
Total European supply year to date stands at €62bn compared to €78bn for the whole of 2022, with many keeping half an eye on the post-GFC record of €105bn set in 2021.
Following the summer recess, we have seen 21 deals priced for a total of €11.3bn, with a further 11 deals in the active pipeline that could add approximately €3bn in ABS and €2bn in CLOs.
So where exactly is this issuance coming from?
UK ‘bank’ issuers of residential mortgage-backed securities (RMBS) have continued to lead the pack with heavily subscribed deals coming in quick succession from smaller lenders, Principality (Sonia+55bp) and Leeds Building Societies (Sonia+52bp).
Interestingly, although continental RMBS has remained quiet in 2023, a rare exception appeared last week with a first deal by ING in the Netherlands since 2006. It was called Green Lion and, as the names suggests, boasts loans backed by the most energy efficient homes.
We have also seen a flurry of consumer deals across Spain, Italy, Ireland, and Germany from several bank issuers, including BNP and Soc Gen. But it is Santander that continues to consistently tap the market, with three deals, offering mezzanine bonds as well as AAA bonds, which were motivated by both funding and capital relief. These deals have also seen strong interest and we saw mezzanine bonds in one such deal 12 times oversubscribed before pricing inevitably tightened.
In contrast, we are seeing depressed CLO issuance with €17bn-worth of deals so far in 2023 compared to €26bn in 2022, a result of ongoing difficulties with arbitrage.
Further afield, it is worth a comment on the Australian market, which continues to grow with consistent issuance throughout the European summer period. This continued in recent weeks, now with A$31bn of RMBS issuance so far this year, which will almost certainly outstrip the post-GFC high of A$37bn in 2017. We think this market offers value at AAA, with spreads on bank RMBS offering a currency adjusted pick up of 20-25bp versus UK and European equivalents.
After a hectic couple of weeks, we have had a ceasefire in new deals announced over the last few days, a small pause to allow the pipeline to simmer down. But the frenetic activity, dominated as expected by banks as they adjust funding and capital needs in the post QE era, illustrates the continuing interest in the market.
These banks are leaving spread on the table, improving diversification and spurring market growth, which reinforces ABS as part of a long-term fixed income allocation.