Section 2 - FTSE

DEBT REPORT: ASSET BACKED SECURITIES
82
observed Greener at Société Générale. Most asset-backed
analysts are not expecting the situation to change much
before the end of October, as lack of liquidity some SIVs to
sell off more assets.
Priya Shah, structured credit strategist at Dresdner
Kleinwort, says the vehicles that did not have bank
sponsors were looking particularly vulnerable and while
all the SIVs are looking for temporary liquidity lines to
enable them to dispose of their assets in a more orderly
manner not all would succeed in the current climate. “If
you have half of those non-bank vehicles having to sell
their assets, then that’s going to be a pretty big number,”
she pointed out.
Shah added that the $12bn of assets held in the recently
established SIV-lites would undoubtedly have to be sold.
These riskier variants of the SIV structure do not have bank
sponsors (they have been issued by CDO managers), have
larger capital note structures below the issued debt, and
their collateral is much more concentrated into a single
asset class. Four of the five launched to date have funded
themselves exclusively in the CP market, where they have
no chance of rolling over the debt in the necessary timeframe.
“There’s no one now that going to buy that
commercial paper,”she says.
The shadow of these disposals looks set to inhibit new
issuance for at least another two months, as the triple-A
spreads on prime RMBS will need to halve from the mid-
September levels before the big serial issuers (who
dominate European RMBS) return to the market. This is
because the margins on the mortgages average 55-75bp
over Libor, and they need 40-50bp of excess spread to
cover reserve funds, servicing costs and potential losses.
“That’s the only point at which the arbitrage really starts to
work,”explained Laila Kollmorgen, head of secondary ABS
trading at BNP Paribas in London. By the end of
September, however, there were signs that the market was
turning as triple-A secondary spreads came in 10bp in the
final week of the month. Kollmorgen said that indicated
primary market should come back within six weeks.“At the
latest it’s going to be mid-November.”
While the European bank-sponsored conduits, which
hold the equivalent of around $300bn of asset-backed
securities will not be able to start buying again until ABCP
margins come back to at least 10bp over inter-bank rates as
in the US, there are fledgling signs that real-money
investors (insurers, pension funds and rational asset
managers ) are setting up funds to acquire discounted ABS,
as PIMCO and others have done on a large scale in the US.
These buyers should then account for a larger share of the
investor base going forward in as European securitisation
gets back on track—albeit with risk re-priced from the
spread levels that prevailed before July—in 2008.
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NOVEMBER/DECEMBER 2007 • FTSE GLOBAL MARKETS