Where Did all the Banks Go?
European ABS primary markets have started 2021 at the solid pace that most market participants expected. The market saw a patchy Q4 in which activity petered out early, not helped by the dominant UK market suffering some hesitation whilst tightrope Brexit deal talks went to the wire, but also as a result of a rather more simple fatigue that appeared to have set in.
One ongoing trend is that banks, typically the mainstay of the primary markets, were conspicuous by their absence last year following the onset of the pandemic, and we’ve seen this continue into 2021. Secondary spreads for bank deals have been driven in to the tightest levels seen since 2007, but without attracting any significant bank issuance. Instead, we have seen a good array of non-bank deals; almost all with interesting mezzanine bonds for sale. In our view this lack of bank-driven supply is the result of well flagged excess liquidity sloshing across the European banking system through reinvigorated cheap funding tools like PEPP and TLTROs in Europe and TFSME in the UK.
Kicking off the year, TwentyFour’s own UK Mortgages Limited (UKML) was first out of the blocks with a heavily oversubscribed £400m UK BTL deal comprising collateral from debut lender Keystone, followed closely by another debut issue and equally successful UK BTL deal from LendCo. There are also deals in the market currently from regular UK credit card lender Newday, and an interesting inaugural Social Bond by specialist lender Kensington aimed at financing lending to underserved borrowers. This level of activity in the UK market has gone some way to eroding the ‘Brexit premium’ that has been borne over the last 4 years and their successful placings should help further improve liquidity in secondary markets.
From mainland Europe, there are two Irish RMBS deals; one a regular repeat deal from non-bank Dilosk and another very different deal backed by re-performing collateral. The CLO market has also opened up quickly with deals by mainstays Apollo, Pinebridge and Partners Group of particular note, and with the promise of one of the busiest quarters the primary market has seen in recent years.
Whilst the swathes of highly accommodative central bank funding schemes continue to support the banking sector, we believe the non-banks will most likely represent the lion’s share of issuance this year, however we do believe that the current tight spread environment, driven by the paucity of supply, may tempt some of the more traditional banks to change plans and issue through the year bucking the consensus view.