Are markets finally following the Fed?
The start of 2023 was very quiet for ABS issuers from mainland Europe, in contrast to the UK ABS and European CLO markets where issuers have been quicker to move on the back of improving credit market conditions. This early year drought continued a run of very low issuance from continental banks that stretches back well into 2022.
However, this has changed materially over the last few weeks as issuers who have for some time shunned ABS thanks to cheap funding from the ECB’s TLTRO programme have come to the fore. We had anticipated bank lenders on the continent would return to ABS as they weaned off central bank funding, but the timing of this activity is very calculated. The ECB clarified that purchases in the primary market under its ABS Purchase Programme (ABSPP) and others will cease in March, with only reinvestments through the secondary market to be made thereafter.
To give a little context here, in 2022 we only saw 27 European ABS deals (a total of €17bn) placed with investors where the lender also had TLTRO access, and only nine of these (a total of €6.6bn) were printed in the second half of the year.
Despite having to wait until January 25 to see the first European ABS deal of 2023, we have now seen nine deals so far for a total of approximately €5.9bn. Auto ABS has unsurprisingly dominated, with German issuers leading the way, but French Auto and Credit Card ABS have also resurfaced, and we see a regular Rabobank Green RMBS deal in the pipeline as well as an inaugural deal from Toyota in Italy.
There is a strong indication then that banks are now ready to tap the market to reacquaint themselves with an investor base that will be more important to them over the long term, now central bank support is being phased out. Encouragingly we have seen this supply met with very healthy demand beyond any ECB participation, with around 30 investors playing in each deal and strong price traction – reassuring for new and repeat issuers waiting in the wings.
For asset managers and other buyers, this spate of issuance has reactivated this core market segment for European ABS investors, and it should be another step along the road back to post-QE normality. It will also serve to broaden the range of highly liquid assets available to investors, a boost to portfolio diversification and, over time, a boost to secondary market activity as well.
In a world where cash is expensive, short, floating rate AAA ABS bonds yielding 3%-plus in euros (around 4.5% in sterling) look attractive, particularly given the prospect of a further 1.37% in yield being added if the rate hikes being priced in for 2023 materialise.