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The banks are alright, but volatility strikes European ABS market

In an eventful week that reminded some market participants of 2008, the trepidation arising from the collapse of Silicon Valley Bank was also felt in European securitisation.

Though seen as an isolated event by most, SVB’s failure caused volatility and disruption across credit markets. European regulators were swift to announce they saw no contagion risk in the banking system, but bank stocks showed few signs of reassurance. Credit Suisse came under particular pressure, for now handled by a CHF 50bn lifeline from the Swiss central bank.

“We maintain the belief that European bank fundamentals remain sound and that the current rout is temporary but acknowledge that the situation is evolving at a rapid pace and there are outliers like Credit Suisse, which could ignite a firestorm should it experience a run on deposits,” said Rabobank analysts in a research note on Monday (13 March).

The iTraxx Crossover tightened 17bps on Friday (10 March) to 498bps, retracing some of the previous day’s 50bps swing. With volatility seizing credit markets once again, activity in structured finance was low. Though sources spoken to by Debtwire did not see a direct impact from the SVB events, spreads did widen across the board, with CLOs most affected.

“We are not seeing any ‘direct’ effect on the European structured markets from the SVB story, but of course given the very high level of correlation in credit universe, the brutal widening in indices and the weakness spreading in corporates and financials, markets are going to produce some effect across the board,” one trader said on Monday. “We have seen so far some better sellers in CLO paper (triple-A/double-A/single-A 25c-50c lower, triple-B/double-B up to 1pt–1.5pt lower) whilst bids for senior ABS/RMBS are pretty much in line with last week closing marks. We believe the latter being a sweet spot (safe haven) for any defensive positioning for both the FRN nature of the bonds and for the granularity/security and credit protection during turbulent markets situations.”

Later in the week, the widening contagion did spread somewhat to ABS and RMBS, though with limited flows. The sole deal in primary, Enra’s Elstree Funding No. 3, managed to price on Thursday (16 March) despite the worsening sentiment but paid up on the mezzanine tranches.

“[We’re not seeing] heavy selling, but of course SF products couldn’t remain untouched by the broader credit markets volatility,” said the trader on Thursday. “From the recent trading flows, we’ve just seen senior ABS/RMBS moving around 15bps to 20bps wider versus pre-banking crisis event — the rate hike was already priced in, and we do feel that this time markets have appreciated credibility and stick-to-the-plan willingness. Besides, statements/[press conference] replies to enquiries could have been much more supportive. Anyway, tough times ahead…”

The same sentiment was echoed by an investor who said that market participants are playing a waiting game, but the few lists circulating seem to offer an opportunity to buy cheap bonds.

A EUR 12.2m, mixed ABS list due on Thursday traded in full. Covers were released on four of the six bonds on offer. Italian auto ABS A-BEST 17 B covered at 99.721, Autonoria 2019 C at 99.61, Magoi B covered at 99.2 and SC Germany Consumer 2020-1 C at 99.155. No covers were released on Cardiff Auto Receivables Securitisation 2022-1 B or BL Consumer 2021-1 D.