Asset Backed Securities

While many credit markets have experienced a significant rebound from the broad spread widening of late 2018, muted primary market activity has meant European ABS spreads have lagged the trend. TwentyFour Asset Management’s Ben Hayward explains why he believes this has created a potentially short-lived relative value opportunity for investors.

“…everybody’s having fun. Look to the future now, it’s only just begun.”

Bloomberg reported on Monday that since the European Central Bank started its Corporate Sector Purchase Program (CSPP) in June 2016, it has purchased €177bn of investment grade rated corporate bonds. Initially, as expected, spreads tightened rapidly, but since the first quarter of 2018, they have been gradually widening back out to pre-CSPP levels.

On Monday my colleagues on TwentyFour’s Multi-Sector Bond desk published a blog on rising default risks in high yield credit. Dummen Orange, Douglas, Boparan, Moby, Galapagos and CMC Ravenna are some of the obvious under-pressure names held in loan funds and CLO portfolios that are trading at a significant discount in the market.

Changes in regulations are typically long and drawn out, but their impact can often be felt quite quickly. There is every chance that this could soon be the case in ABS markets.

At TwentyFour our Italian ABS holdings are fairly moderate, and in general our peripheral ABS exposure has been steadily decreasing for some time. This has nothing to do with credit quality, but everything to do with relative value.

Sadly this is not a review of the new Queen biopic, it’s a eulogy to a bond which was called today that is as well known in the securitisation world as Freddie Mercury is in the real one – Paragon Secured Finance 1 (or PSF 1 as we knew it).

This year has been a big one for sterling bond supply, especially in the ABS market. With the end of the Bank of England’s Term Funding Scheme and the comeback of traditional bank issuers, UK issuance volume year-to-date has totalled €25bn from 38 deals placed across different asset classes.

There have been a number of recent articles in the mainstream press about the 10 year anniversary of the collapse of Lehman Brothers, with some saying familiar risks are emerging and questioning whether lessons have been learned.

In the early 1990s, Marvel comics introduced a world 100 years in the future with new stories for its popular heroes and villains. Doctor Doom's story was called "The Doom of Tomorrow".

Since that first encounter the market has remained a core financing option for banks’ consumer and corporate lending books, but there has always been a degree of innovation around the fringes.

Now that the summer lull has finally kicked in, it seems an ideal time to review the ABS market so far this year and try to make a prediction for the remainder of 2018.