ABS Market Recovery a Question of Timing

May 25, 2009

The deadlock regarding securitization activity in Europe still persists. While pressure on credit markets eased significantly since March, ABS spreads did not follow suit! Given the rapid pace of spread tightening and sentiment changes in the credit universe during the last couple of months, the jackpot question this spring from a credit risk perspective regards timing: Will the credit crisis fade sooner than anticipated or do markets face another bull trap? And will the ABS market keep its outcast status or will there be a rehabilitation? Asset backed securities have been impacted more than any other sector by the crisis. Having been at the center of the storm, this market has changed significantly during the last two years. First of all, public placements have practically become non-existent: This is due to unattractive issuance spread levels (average 'AAA' RMBS spreads over 2009 were quoted in areas above 300 to 400 basis points) as well as a prevailing lack of investors, especially for lower parts of the capital structure. As banks hardly had realistic alternatives to relatively attractive central bank repo refinancing, a flood of repo transactions occurred (E912 billion ($1.25 billion) 2008-2009 year-to-date). However, outstanding ABS volumes which were retained for central bank repo windows have started to flatten out.

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