The great annual securitization market escape to the shores of the Mediterranean delivered in fine style this week, with investors, lawyers, rating agencies, issuers, bankers and journalists being delighted to once again convene under the wide-brimmed umbrella supplied by IMN and Afme.
However, while attendees were more than happy to get together and show off their latest pairs of chinos and short-sleeved shirts, opinions on Europe’s economic outlook and the consequences for the market were decidedly mixed.
Most panellists on the stage expected interest rates to be near their peak, but some delegates told GlobalCapital they thought the consequences of rates rising may have been underestimated.
Several delegates suggested that consolidation of UK buy-to-let lenders is likely if rates keep rising. The time delay between origination and funding means their business model is not working while rates are increasing.
Issuers who do not have deposit funding are having to rely on bank warehousing while they try to keep their businesses going, delegates said.
Testing the pool's waters
In addition, pool performance was another topic high on the agenda at Global ABS, with both investors and issuers keen to gauge sentiment among their partners and competition.
“We are meeting a number of different originators across asset classes and jurisdictions, to understand their evolution and performance,” KKR’s Anirban Ghosh told GlobalCapital before the conference. “[We are] keen to hear their recent experience around increased defaults (if any), stability in underlying LTVs, and potential difficulty in originating meaningful volumes at higher yields given funding costs. [What will the] resulting implications be for ABS issuance volumes over the next 12 months?”
Central bank policies were a prominent point of discussion in that area as well as they are seen as driving the ABS market’s dynamics.
“The balance sheets of central banks are barely peaking, so we still have very strong technical demand for our asset in particular which drives spreads tighter and sellers are still met with flows of liquidity,” said Colin Behar, ABS portfolio manager at USS, while speaking at the institutional investors’ roundtable on Wednesday.
“Short-term rates are still negative,” he continued. “Inflation is above short-term rates, so central banks are still supporting the economy, which, I think, has led to pretty strong performance all things considered. That might change going forward.
“I’m most concerned about long-term rates. For example, CRE valuations are related to long-term rates. This is where there are substantial losses in the system.”
Eric Benoussaid of Société Générale, while speaking at the traders’ roundtable on Tuesday, said that he expects interest rates to continue increasing.
“If you’d asked me yesterday [about the UK], I would have said there would have been one or maybe two more rate hikes,” he said. “Now it seems like it could go even further, especially with the sticky core inflation. In Europe, inflation is also quite sticky. Interest rates should still increase. There will be maybe one more rate hike for the ECB.”
Debate over rates
Other panellists debated about what rate cuts would mean for the market. They agreed it would be positive for credit but suggested that it could be bad for the relative attractiveness of ABS paper, as it uses floating rates.
“You’re going to see almost the reverse technical play out that we benefited from at the start of the rate-rising cycle where we saw a lot of asset allocation into floating rate got out of fixed rate product,” Alex Harrison of HSBC said. “There’s clearly a potential when you get to the inflexion point on the rates the other way for that to shift the other way.”
Harrison thought the real determinant of spreads would be whether central banks could keep inflation under control without tipping the economy into a severe recession. But he also suggested that the banks may have already done too much.
“It probably is actually more about a third factor,” he explained. “Which is whether central banks have overshot and kept things under control when we've actually dropped into kind of fairly difficult times economically speaking, as a result of keeping rates too high for too long.”
Others took more optimistic views.
“I’d say we’re probably close to peak [interest rates] and I think stability could be extremely encouraging anyway for our asset class,” Morgan Stanley’s Max Gordon-Brown said at the traders’ roundtable.
“Given some broader macro concerns are falling away at least in the near term, there is the potential to rally at some point,” said Tristan Cheesman, head of EMEA/APAC structured finance syndicate at Bank of America, at the ABS market outlook panel on Wednesday.