Light at the end of the inventory tunnel
The first two trading weeks of the year are coming to an end and unlike previous years they have been packed with activity. Traditionally the ABS market is one of the slowest to come out of hibernation as it waits for broader credit to lead the way, which means we’ve had years with only one or two deals priced in January.
This time around, straight out of the blocks dealers were reporting meaningful secondary trade posts as investors were on the hunt for floating rated bonds, unsurprising given the inflation figures we are seeing and the rate hikes that will likely follow. As a result the overall market has tightened by a couple of basis points, but the real test for any bond market comes when primary deals get done.
In recent years a healthy CLO pipeline has delivered, but so far we’re waiting for the first CLO to price. If price guidance is anything to go by, we expect to see marginal spread tightening in investment grade notes and for sub-IG notes to open pretty much flat to where they ended 2021. Nevertheless there are around 8-10 CLOs looking to be priced in the coming weeks, including a number of upcoming refinancings. 2021 was of course a record year for CLO supply, with €39bn of new issuance and a further €61bn of repricings, making CLOs roughly one-third of the entire European ABS market by outstanding volume.
In RMBS we are about to see the first deals priced, and specialist lenders have been at the forefront looking to soak up some of that demand. Belmont Green’s Tower Bridge RMBS looks to be at the head of the queue. This UK buy-to-let (BTL) RMBS deal is seeing a lot of demand as subscription levels (at initial price thoughts) were 2.4x for the senior bonds and up to 6.8x for the IG rated mezz bonds. We also expect Citi’s third Dutch BTL RMBS deal, Jubilee Place, to price on Friday. BTL in the Netherlands is a much smaller market than in the UK, and with this being a multi-originator deal, it looks to be coming at a small premium versus more plain vanilla BTL, and equally it provides some much needed euro supply.
In the UK we have seen further announcements from the likes of Paratus (another BTL RMBS) and ENRA (non-conforming RMBS), but we can also see multiple deals from other jurisdictions such as Ireland. We have heard from investment bank syndicate desks that we could see some high street bank Prime RMBS come to market in the coming weeks, as banks finally start weaning themselves off cheap central bank funding. We think this will be a slow process, but the supply that ultimately arrives will be very welcome for ABS investors that have been starved of such paper in recent years. What we haven’t seen so far is any Auto ABS or Consumer ABS, but I’m sure that’s just a matter of time before the large car manufacturers fire up their primary market engines again.
So after a post-2008 record year for European ABS with €105bn of new supply, we don’t expect 2022 to disappoint, and if anything we think this year will keep us even busier than 2021.