Asset Backed Securities

In the past few weeks CLOs have become the focus of much attention, both from market participants and the media, especially following the negative rating actions that agencies have taken on the underlying loans as well as CLO tranches.

European ABS primary markets re-opened late last week with the pricing of the first publicly syndicated deal since recent events took hold of global financial markets. Long-standing issuer BMW priced a 1.6-year AAA German Auto ABS deal at three-month Euribor +40bp, having increased the size of the deal to €700m and finishing around 1.7x oversubscribed.

Partner and Portfolio Manager Ben Hayward provides an update on European ABS markets.

After six weeks of no supply, the market somewhat surprisingly reopened with three new issue CLOs being priced last week and a new one already on the way. We are aware of many loan warehouses that need to be cleared, and bankers (or rather their risk managers) are no doubt keen for CLO managers to refinance leveraged loans into a CLO.

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.

Partner and Portfolio Manager Ben Hayward provides an update on the European ABS market.

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.

Partner and Portfolio Manager Rob Ford provides an update on UK Mortgages Limited

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.

Partner and Portfolio Manager Ben Hayward provides an update on the European ABS market.