Incredibly low default rates support the case for high yield credit
Recently Santander successfully priced its SC Germany Consumer 2021-1 securitisation (SCGC 2021-1). The mezzanine tranches were well oversubscribed at between five and seven times covered, allowing the issuer to significantly tighten spreads from initial guidance despite increasing the deal size from €1.1bn to €1.5bn, rather larger than most deals in this market. The AAA notes were priced above par at a spread of 20bp over Euribor, with the three investment grade tranches priced at 95bp, 135bp and 185bp and the two sub-investment grade tranches at 280bp and 350bp.
Santander is a well-known and regular issuer of benchmark size securitisations in Europe via various platforms and across several asset classes. SCGC 2021-1 is backed by German consumer loans and the pool shows a long and strong performance history. This deal has a granular portfolio and is structured very efficiently, with the stable performance and short term nature of the loans allowing a one-year replenishment period and bondholders also protected by various covenants. The end of the improved furlough scheme in Germany should have little impact on the pool, and the country’s improved economic outlook post-COVID should also contribute to stable performance.
European ABS supply has been plentiful and varied since the summer, though in our view the quality has also been mixed and we have passed on deals making use of more aggressive structures that we felt did not suit the asset class or the loan originator. Auto loan and consumer loan ABS have been the tool of choice for banks and some other smaller specialist lenders in the second half of this year, and where more aggressive structures have been used many deals have been priced tighter than we’d consider reasonable.
The larger size of Santander’s latest deal meant the original price guidance was a little wider than comparable deals, with guidance of low-to-mid 200s on the BBB notes offering around 50bp of premium to fair value in our view, though the tightened final spread of 185bp was in line with comps.
We like the Santander Consumer Germany platform and have historically been a supporter of deals like this, with a size of €1bn-plus only adding to the appeal this time around as it improves liquidity significantly for investors. As mentioned we have passed on many consumer ABS deals this year, but judging by the strong demand for SCGC 2021-1 we weren’t alone in thinking it looked attractive.