Summer Supply Creates Pricing Opportunity
In the past two years the diversity of supply in the ABS market has been restricted by the availability of cheaper funding alternatives, both in the Eurozone through the TLTRO and in the UK, where the BoE Term Funding Scheme has suppressed issuance from the traditional banks and building societies. 2017 was characterised by low Eurozone ABS issuance and UK supply predominantly coming from non-bank/specialist issuers. We are glad to see this scenario has changed since the beginning of the year. In fact, increased diversity of supply has been a feature of the 2018 market.
Looking at European distributed new issuance (excluding CLOs) for 2018, some 54 new deals were printed and distributed in the first half of the year versus 45 and 41 in H1 2017 and H1 2016, respectively. More supply has come from non-UK jurisdictions this year compared to 2017 and 2016, with issuers from countries like Belgium and Finland printing for the first time, bringing new geographical flavours into the market. The end of the Term Funding Scheme in the UK has also provoked the comeback of traditional banks, with eight deals issued versus just three in H1 2017.
Diversity has improved not only through a greater variety of geographies and issuers, but through different types of collateral. While 2017 and 2016 YTD new issuance in H1 was mostly RMBS (72% and 62% respectively), mortgage-backed deals have been far less dominant in H1 2018, with issuance standing below 50% of total placed volume. Non-performing loan ABS issuance continues at a fast pace, with nine transactions coming from Italy amounting to €8.7bn of notes and other three deals coming from Greece, Portugal and Ireland.
CMBS issuance is already at €2bn year-to-date – compared to just €392m in the whole of 2017 – with deals backed by offices, retail and logistics properties located across Europe from the UK to Italy and Finland. On top of that, the pace of auto ABS supply has doubled compared to the last two years and growth in unsecured lending has led to an increase in consumer ABS issuance. The emergence of risk tiering has also contributed to widening the investor base. We’ve seen full capital structure deals in the Dutch prime RMBS and Finnish CMBS sectors, and even a very unusual UK auto deal placing notes from AAA down to BB.
Diversity, though, does come at a price (for issuers). Deals from first time issuers, from new jurisdictions or with different collateral have so far offered an attractive premium, usually ranging from 20bp to 80bp over UK RMBS deals from established issuers.
High volumes and greater diversity of supply have given investors not only the opportunity to maintain a balanced and diversified portfolio, but also the opportunity to pick up yield while reducing risk. At TwentyFour we spend a lot of time analysing new transactions and assessing the quality of originators and collateral, so we believe diversity in the ABS market is more than welcome to stay for the time being.