Evis Progonati, Assistant Editor at Debtwire ABS Europe, Paolo Binarelli, trader at Banca IMI, Rob Ford, portfolio manager at TwentyFour Asset Management and Sjoerd Humble, head of funding & portfolio management at Obvion sat down to discuss primary and secondary market conditions, which sectors offer more relative value, the effect of lockdowns and government stimuli on Europeansecuritisation performance, the impact of regulatory interventions and whatmore policymakers should do. 

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Contextualising this crisis,  how is it different from the Great Financial Crisis of 07-08-09? How has the market responded? Have the fundamentals been affected?

One main difference is evident so far, the time frame of how events unfolded.

In 2008 – 2009 it was an elongated crisis, with spread moves and recoveries taking months and even years.

This time in a maximum period of two weeks, spreads moved very quickly, so there wasn’t much of a chance to get paper recycled and be traded. When we started to recover, there was not much offer from the dealer community, we had a vacuum in the last two months. Maybe it is different in other markets, possibly more in the ABS market because we haven’t seen a sustained reopening of the new issue market yet.

Return of primary market

While we have seen some activity from German auto issuers, all panellists agreed that we don’t know yet when the primary market will return in a meaningful way.

In the case of Obvion, the originator is in a very good situation with very limited refinancing needs this year, it has already done one deal of EUR 1bn at the end of January, before the coronavirus crisis unfolded.

In general, issuers entering the securitisation market will consider two main factors:

• ECB funding providing cheap liquidity for issuers means securitisation would have to compete with that
• And what will happen on the lending side.

In the case of Dutch mortgages there has not been any impact yet in the market due to the coronavirus, volumes are still at the same level prior the virus, though the expectations are that levels will go down towards the end of the year as the impact of the crisis becomes more pronounced.

Secondary market

Broker screens went off and volumes dropped significantly from the half of March until the first week of April. Sellers discussed what they were able to sell and they were unable to get meaningful prices.

In the last weeks there has been a good recovery, especially at the senior level. As liquidity is coming back, everything looks cheaper in terms of spread. For auto ABS, spreads are three times where they were before the crisis hit.

Some investors are coming back on other less liquid assets classes.

In CLOs, we have had continuous activity with a spread moving much more accordingly with better credit, compared to other parts of ABS market. CLO investors are also more comfortable with volatility and thus they were more open to remaining active as the fallout unfolded.

As to what the future holds, it is not easy to forecast what it will happen. Different counter parties have diverging views.

Will investment grade tranches of European ABS suffer principal losses?

Data so far is not very meaningful.

It will be significant to understand how the different moratoria scheme are going to impact the deals in terms of dynamics, will the loans subject to moratoria return to performing or will they be transformed into long term delinquencies.

The real economy will be definitely impacted, and the impact will be different across the various economies, as the government stimuli are very different.

In Italy for instance they introduced three or four different schemes for the economy. How much will translate in cumulative default in securitisation transactions will require more time. How will this support the economy? It will take some time to discover it.

In Italy and most European jurisdictions, portfolios tend to be quite diversified in terms of seasoning, so we are likely to see certain buckets performing better than others, depending on the borrower type. But overall, are in a better position compared to the GFC, transactions are much more resilient to this kind of shock.

In the Netherlands, stimuli are mainly focused on helping people keeping their jobs, which is positive for mortgages and the RMBS market.

One measure we took as a lender, that may impact the transactions, is offering a payment postponement to clients for up to three months. Some 50bps of clients in those transactions have taken it up, so for now the impact is negligible.

Investors will have to see what the economy impact will be and if there will be a second wave of infections which will become visible towards the end of the year and beginning of next year.

In the UK there haven’t been specific support for mortgage payments. We had employment support for the self-employed sector, with the funding arriving now in these weeks.

The subsequence of this crisis is about forbearance, not foreclosure. We will see lenders provide forbearance for some time. In sectors like UK non-conforming RMBS, yields are higher so they can sustain a higher level of payment holidays.

NPLs and CMBS need to be considered on a case by case, heavily affected by retail, oil and fuel as well and travel, they will be more affected.

In conclusion, investment grade ABS is well positioned to not suffer any losses as the support in these transactions is solid.

How will the NPL market be affected, especially in Italy?  Will we see more GACS issuance?

In Italy as tribunals and courts had to shut down all proceeds on those deals have come from out of court processes. We are seeing that rating agencies have taken a view on the deals, in line with the general view on Italy.

A new wave of non-performing exposures could emerge from this crisis and it could be an opportunity for distressed debt investors.

A new provision introduced in decree ‘Decreto Rilancio’, allows a servicer to get paid even if the performance of the underlying portfolio is not in line with the business plan, causing some noise in the market. We are still expecting recoveries to continue in the existing stock but we will definitely see a new stock of NPLs in the market, across the different jurisdictions.

However, it’s still very early days in terms of performance numbers.