Dutch RMBS market escaping doldrums fuelled by pre-crisis payments
* Aggressive bids on Dutch RMBS in secondary and primary
* Liquidity returned to the market as pre-crisis cash handed back
* Housing market could have turned a corner
By Owen Sanderson
LONDON, Nov 1 (IFR) - Demand for Dutch RMBS is firming up, after a year of continuing house price declines and spreads in the asset class lagging further behind UK RMBS.
Clips of Dutch RMBS were auctioned in the secondary market on Monday, garnering covers (the second-best bid) above the offers on screen, while Van Lanschot found more than EUR1bn of demand for its new RMBS.
The latter is not unusual for the larger banks, but Van Lanschot announced a partial placement of minimum EUR500m to the market, suggesting that printing the full EUR244m and EUR639.6m tranche sizes was uncertain at best when the deal was marketing. Van Lanschot is seen as a weaker originator of RMBS deals than the large banks ABN AMRO, ING and Rabobank, and is a less frequent issuer, meaning investors may have smaller credit lines in place.
Strong bids for Dutch paper may have been driven partly by big redemptions from pre-crisis deals, which were typically structured with 5- to 6-year average lives, meaning peak market deals are now coming due. Rabobank's Storm 2007-1 paid down on October 22, handing bondholders EUR1.702bn - much of which they may want to invest in new issues.
Other factors include the market's belief that volumes in the housing market will remain depressed, with house prices 19.6% below their August 2008.
This means lower conditional prepayments rate (CPR) assumptions in mortgage bonds, which can extend the average life of the RMBS notes.
And while market players may agree on what the spread over Euribor for a bond should be, their CPR assumption influences the price - for example a five cent move on a shorter bond will have a large impact on spread than a longer note.
For post-crisis deals trading over par, the bond's value incorporates receiving current coupon on large outstanding volumes. A rapid pay down means a quick redemption below market prices.
Monday's BWIC saw EUR10m of Dutch MBS 2010-15 A2 covered at a cash price of 101.45, and EUR10m of Saecure 12 A2 at 101.37. According to one trader, these prices assume a prepayment rate of around 2% to get to the discount margins that put them in line with the market.
Another trader said the piece of Dutch MBS was at 45bp DM and the Saecure was 80bp. The first trader said he was bidding the same bonds but assuming a faster prepayment rate, since he felt the Dutch market would pick up from the current low prepayments, and the market had could improve following house price declines this year.
LUNET LOOKS TO LCR
Lunet 2013-1 was the major price point in primary, and illustrates the strong bid for Dutch bonds, but also the market technicals, and specific points about the deal.
According to Conor O'Toole, head of ABS research at Deutsche Bank, the large banks, ABN AMRO, ING and Rabobank account for 87% of the Dutch RMBS issuance this year.
Therefore, investors find deals from smaller originators desirable, and this is reflected in pricing, with Lunet 2013-1 A2s at 108bp, just 18bp back of where the last Rabobank deal printed. The A2 notes are a particular reflection of sponsor strength, since they rely on a call from the issuing bank to redeem on schedule.
"In our view the strong pricing on [Lunet 2013-1] (we would have expected a larger basis) underlines the sponsor concentration issues faced by the sector," O'Toole wrote in a note.
Lead managers ABN AMRO, Natixis, Rabobank and RBS took F. Van Lanschot Bankiers (which specialises in high-net-worth banking) on the road in the week of October 21, marketing minimum EUR500m of the EUR244m A1 notes and EUR639.6m A2 notes.
Price thoughts were published on Monday at 3mE+50bp-55bp for the A1 and 3mE+110bp area for the A2. By Tuesday, the leads had EUR600m of demand, skewed towards the larger A2 tranche, and by Wednesday both tranches were fully subscribed. Both tranches priced at the tight end, 50bp on the A1 and 108bp on the A2, with the A1 1.2 times done and the A2 1.3 times done.
The A1 was allocated 48.8% UK, 26.8% France, 6.8% Netherlands, 6.6% Belgium, 1.2% Germany, 1.2% Italy, and 8.6% other. By type it was 55.1% fund managers, 29.7% banks, 6.6% insurance / pension funds, and 8.6% other.
The A2 was allocated 62.2% UK, 10.6% Netherlands, 9.1% Belgium, 6.7% France, 2.6% Scandinavia, 1.4% Italy, 1.1% Germany, 0.8% Switzerland, 5.5% other. By type it was 59.7% fund managers, 33.9% banks, 0.9% insurance / pension funds, 5.5% other.
Van Lanschot has reorganized its RMBS programmes, retiring the Citadel programme after a secondary remarketing of Citadel 2010-2 in April this year.
Lunet (a name which also refers to a fortification) is the public programme, and as such, has new "best practice" features included.
"The big difference is that the new shelf is PCS eligible and LCR friendly," said Ralf van Betteraij, treasury management at Van Lanschot. "We wanted to make sure bank treasuries could buy this, and we did indeed see some new bank buyers in the book."
He added: "We knew we had something unique in LCR friendliness, and some accounts really seem to welcome diversification, having got full on some of the other programmes in the market."
The LTV was structured to be below 80%, making it eligible for bank LCR liquidity buffers according to the most recent rules published. (Reporting by Owen Sanderson; editing by Anil Mayre, Alex Chambers)
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