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October 14, 2016  

European Issuers Crowding Into Market

Europe’s near-term issuance pipeline is growing.

Industry participants describe a situation in which a number of asset- and mortgage-backed bond issuers are preparing deals, continuing a recent flurry of activity that followed a slow period in July and August. Among them is a Spanish subprime-mortgage transaction from Santander unit Union de Creditos Inmobiliarios.

What’s prompting the dealflow? Sources pointed to below-zero yields on German auto-loan deals from BMW, Ford and General Motors in September as signaling to issuers that now is the time to lock in low funding costs. The belief is that even if the upcoming transactions offer only slightly positive returns, that could be enough to satisfy investors.

Consider the message one asset manager is sending to his backers. “Our pitch sounds a bit like, ‘You can invest in [German government bonds] and lose money, [corporate bonds] and break even, or ABS and make money,’ ” he said, referring to low yields that have taken hold across Europe’s fixed-income market.

In a sign of healthy demand, Cerberus Capital priced £1.15 billion ($1.4 billion) of bonds backed by landlord loans on Oct. 11 with Credit Suisse, Lloyds Banking, Morgan Stanley and Wells Fargo as lead managers (see Initial Pricings on Page 10). The issue, Towd Point Mortgage Trust, 2016-Auburn 10, had hit the market with an initial size of £600 million.

The deal’s expansion came partly in response to inquiries from Japanese banks, which have seen their buying powers grow as the British pound recently has fallen against the yen. They expressed particular interest in the offering’s senior notes.

The Cerberus transaction is backed by accounts from Capital Home Loans, an operation the company bought from Permanent TSB in July 2015.

The Santander issue, Fondo de Titulizacion de Activos RMBS Prado, weighs in at €420 million ($460 million) and is expected to price in the coming weeks with BNP Paribas and Santander running the books. It also appears to be generating a strong reception.

That said, the offerings are unlikely to reverse a longer-term slowdown in the distribution of structured products in Europe. While activity had been picking up modestly early this year, it remained well below pre-credit-crisis levels — and then tapered off even more following the U.K.’s June 23 vote to leave the European Union.

One limiting factor looking forward is the Bank of England, which has revived a component of its crisis-era Funding for Lending program under which banks can use retained mortgage bonds as collateral for low-cost repurchase contracts. Those facilities had been unavailable since 2014. And given that they are seen as more economical than open-market securitizations, the expectation is that many would-be issuers will opt for them instead. “That doesn’t mean [supply] will dry up altogether,” one investor said. “There are non-banks that will issue, and even big banks that want to keep their tail in the water. But it will certainly have an impact.”

As for the recent auto-loan deals in Germany, BMW priced its €1 billion offering on Sept. 21 with its BMW Bank unit teaming up with RBC Capital to run the books. Ford priced its €619.5 million transaction on Sept. 15 via Banca IMI and Bank of America. GM sold €486.3 million of bonds on Sept. 23 via UniCredit.

Just $4.5 billion of fresh securitized products were distributed in Europe in July, followed by $3.4 billion in August, according to Asset-Backed Alert’s ABS Database. September brought a $7.1 billion total. Year-to-date issuance stands at $57 billion, behind pace to match the full-year 2015 tally of $90 billion.