Barclays Capital has called for further government intervention in the Asset Backed Securities (ABS) market.
In a media presentation this morning, it said that the unprecedented problems in the sector, which comprises of commercial and residential mortgage backed securities (CMBS and RMBS), could only be sorted out by the central banks working with the government.
However, it said that the process of implementing the necessary policy reforms would need to be ‘messy’ to be effective.
Following Chancellor Alistair Darling’s comments about the formation of a bad bank to hold asset-backed securities, Hans Vrensen, head of European securitisation at Barclays Capital, said:
‘The bad bank announcement this morning has tightened the spreads – but this may turn out to be a false rally. Whichever way, it shows the reliance on government policy – this will be a big theme for 2009.’
He also welcomed the government’s regulatory changes to the ratings agencies, which he predicted would have a growing influence on the market this year. But he warned that the new, ‘more proactive’ rating methodologies could trigger earlier and bigger ABS downgrades
Vrensen said he could see no immediate catalyst for the normalisation of the ABS market in the first half of 2009 – nor would there be a recovery of the prime market in 2009.
‘There will be lots more downgrades, and there is risk that the spreads will widen further if the banks are pushed in to selling by increased capital requirements,’ he warned.
Instead, he forecast a continuation of secondary trading with very little un-retained issuance.
Barclays Capital research found that under stress testing of 199 of 839 bonds which had AAA ratings, 39% were rated as ‘buy’ under a ‘severe’ (the worst case scenario) economic stress model.
It showed the UK CMBS sector had £77.1bn outstanding compared with £180.7bn from the UK prime RMBS sector.
Vrensen said that 2009 ‘would not be the year for refinancing CMBS’, but also said that he had seen a recent ‘influx of interest from property investors.’
Focusing on the European RMBS bond sector, it found that under a base stress scenario, UK prime, Dutch prime and Irish prime would register no loss.
However under a projected ‘severe stress’ the performance of Dutch prime at a loss of 6.3% of 118 tranches – more than twice that of the UK – was ‘surprising’ because the it was more tightly priced than in other sectors.
Vrensen said that the reason it had been hit harder than the likes of Ireland – which only indicated a 2.3% loss from 33 tranches under severe stress – was
Spanish prime RMBS was deemed the most vulnerable. Bar Cap said that under base stress, it would suffer a 15.6% drop from 222 tranches in its overall balance, while under severe stress it would more than double the loss to 35.7%.
Similarly, under severe conditions it indicated that Portugal’s RMBS market would move from a 0.71% loss to a 10.87% drop.
Vrensen said that Spain, Ireland and Portugal would continue to suffer more than other European markets