Asset Backed Securities

We engage with Santander as a debt issuer across many jurisdictions and various fixed income products, and we have had mixed views on the bank’s behaviour in recent years following a controversial approach to a 2018 AT1 refinancing and the exercise of an early call in a Spanish ABS deal in 2019. On both these occasions, we felt bondholders were treated poorly and this was reflected in our ESG analysis of the issuer.

After a period of material weakness in spreads and general market stress, the common ingredient to recent corporate bond spread stability and subsequent strength has been the resurgence of the primary market.

As a manager that invests across the full spectrum of fixed income, we are constantly monitoring the relative value of the different opportunity sets that we cover. Given the fast moving prices we have witnessed recently, and with different asset classes and ratings moving at different times, this analysis can become increasingly valuable.

In the last two weeks we’ve looked at how CLOs behaved during the global financial crisis, and we’ve stress tested a current CLO with GFC-like defaults to see where individual tranches would start to take a loss in that scenario. Keeping in mind the rule that the third in any trilogy is usually either the best or the worst, let’s hope this third instalment is more Toy Story 3 than Tokyo Drift.

Clearly this shock/stress test is a severe scenario, but given the uncertainties that COVID-19 has thrown our way, as debt investors we would rather be overly conservative.

In recent weeks we’ve seen significant sell-offs across all asset classes as investors have been scrambling for liquidity. With most of Europe and the US effectively in lockdown, a recession looks to be inevitable and the question is what this will do to corporates’ ability to service and refinance their outstanding debt, especially for those in the sub-investment grade space.

It has been a challenging couple of weeks for obvious reasons.

We noted with interest two headlines yesterday: Italy to suspend mortgage payments amid outbreak and RBS and NatWest offer mortgage breaks for customers affected by coronavirus

Given the material positive performance seen in other parts of the fixed income markets in 2019, the CLO relative value proposition now looks even more attractive.

Ben Hayward looks at the Q4 performance for Asset Backed Securities and provides an outlook for the year ahead.

We have already highlighted the blistering pace of bond sales in both Europe and the US, and this being met with apparently insatiable demand from fixed income investors. Since European ABS markets tend to lag broader fixed income, it seems fitting that we have had to wait another week before seeing that primary machine start to accelerate.

It is not clear to us just how much more monetary easing will placate equity investors, and we see a real risk that when we enter the third quarter earnings season next week, company specific data from the bottom up will be more of a shock than the macro picture has been.