The European ABS Market

Markit Structured Finance Research 23/01/2009 The European ABS Market A Week in Review: 15 – 22 January 2009 Barack Obama’s inauguration and, more im...
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Markit Structured Finance Research 23/01/2009

The European ABS Market A Week in Review: 15 – 22 January 2009 Barack Obama’s inauguration and, more important for Europe, the UK government’s second bail out of British banks, dominated the headlines this week. Structured finance investors around the world are watching Obama’s economic decisions closely. The Markit ABX and Markit CMBX indices rallied this week. Spread (bp) 1,600 1,400 1,200 1,000

Spread (bp) 800

M arkit iTraxx Europe Senior Financials Series 7 Version 1 5Y M arkit ABX.HE.AAA Indices S6 V1 M arkit CM BX.NA.AAA Indices-S3

M organ Stanley

HBOS

700

Bradf ord & Bingley PLC

JPM organ Chase & Co

600

Citigroup Inc

Royal Bk Scotland Gp PLC

500

800

400

600

300

400

200

200

100

0 Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

0 01-Dec

16-Dec

31-Dec

15-Jan

Additionally, the Royal Bank of Scotland, which announced a 2008 loss of £28 billion, saw its five-year CDS jump from 100 basis points to 150 basis points. CDS spreads throughout the financial sector widened on both sides of the Atlantic.

The biggest movers in the European ABS market included both improvers and deteriorators for the second week in a row. Improvers included the market’s most liquid sectors, such as UK Prime and Dutch RMBS.

Top 5 ABS Deteriorators Deal Name Opera Fin Lakeside plc Gracechurc h Card Fdg No 10 PLC FCC LOGGIAS 2001 1 E MAC NL 2003 II BV Magellan Mtgs N o 1 Plc

Series 1 05-1 2001-1 1 1

Cl ass A A1 A A A

Ccy GBP EU R EU R EU R EU R

Isin XS0198555202 XS0232360445 FR0000488462 XS0179206858 XS0140415836

Spread (bp) 888 582 317 676 500

Change (bp) 214.95 12.75 1.12 1.05 0.73

Rating AAA AAA AAA AAA AAA

Sector CMBS Credit Card RMBS RMBS RMBS

Avg Life(yr) 2.6 1.7 2.6 8.0 3.7

Series 2006-1 2006-2 2006-1 3 1

Cl ass A 3A2 A5 A1 A

Ccy EU R EU R EU R EU R EU R

Isin XS0246672355 XS0277508692 XS0273840305 XS0200691805 XS0213557555

Spread (bp) 334 409 417 428 356

Change (bp) -34.62 -26.67 -7.04 -6.48 -2.18

Rating AAA AAA AAA AAA AAA

Sector RMBS PRMBS PRMBS PRMBS RMBS

Avg Life(yr) 5.5 2.1 2.4 1.1 2.1

ABS Improvers Deal Name Arena 2006 I BV Arkle Master Issuer Plc 2006 2 Gracechurc h Mtg F ing PLC Holmes Fing No 9 PLC Arena 2005 I BV

Markit Structured Finance Research

In the synthetic market, the tightening was even more apparent during the first two weeks of January. After reaching all-time wides at year end, AAA spreads have returned to early December levels with Dutch RMBS narrowing to 350 basis points from 380 basis points. UK Prime RMBS tightened to 400 basis points from 430 basis points. Granite narrowed 50 basis points to 610 basis points. This positive tone was not reflected in either Australian or Spanish RMBS, which both widened slightly. The last time European CDS of ABS spreads tightened was during the April May 2008 period, immediately before the significant widening. AAA EABCDS Sector Analysis

Spread (bp) 850 800

Dutch AAA RMBS

750

Italian AAA RMBS

700

UK AAA PRMBS Ireland AAA RMBS

650 600

Granite AAA UK AAA CMBS

550

UK AAA SPRMBS

500

Spanish AAA RMBS

450 400 350 300 250 200 150 100 50 0 Mar 31st

Apr 30th

May 30th

Jun 30th

Jul 31st

Sep 1st

Deal Name

Series

Granite Master Issuer plc Holmes Master Issuer PLC 2007 1 Perm Master Issuer plc 2007 1

Oct 1st

Class

Oct 31st

Dec 1st

Dec 31st

Currency

Isin

Synthetic Mid Spread (bps)

Markit Cash ABS Mid Spread (bps)

Basis (Synthetic Cash)

Average Life (yr)

Duration

2007-2 3A2

EUR

XS0298974840

609

1951

-1342

2.25

2007-1 3A2

EUR

XS0292750253

343

414

-70

2.25

2.09

2007-1 3A

EUR

XS0288090342

463

604

-141

2.88

2.54

2.19

Arkle Master Issuer Plc 2006 2

2006-2 3A2

EUR

XS0277508692

338

418

-80

2.09

1.97

GRACECHURCH MORTGAGE FINANCING PLC 20071

2007-1 3A2

EUR

XS0302999064

345

426

-81

2.98

2.75

Shield 1 BV

1

A

EUR

XS0238072895

350

388

-38

3.01

2.71

Bankinter 14 Fondo Titul Hipo

14

A2

EUR

ES0313271019

473

481

-9

4.74

3.82

German Residential Asset Nt Distributor plc

1

A

EUR

XS0260141584

537

675

-138

4.30

3.38

At the other end of the capital structure, BBB levels remained stable relative to year-end levels. Priced upfront with a fixed cap, the cheapest ABCDS sector is UK Prime RMBS at 40 cents with a running fee of 100 basis points. Granite and UK subprime are both in the 90 cents area.

Deal Name

Series

Class

Currency

Isin

Mid Upfront (cents)

Running Fee (bps)

Markit Cash 100 - Markit Price Cash Price

Difference (Synthetic - Cash)

Average Life (yr)

Duration

Perm Master Issuer plc 2006 1

2006-1 4C

EUR

XS0270511115

54

100

51

49

5

2.73

1.88

Granite Master Issuer plc

2007-2 3C2

EUR

XS0298978320

90

100

8

92

-2

6.95

2.49

Arkle Master Issuer Plc 2006 2

2006-2 3C2

EUR

XS0277529698

37

100

66

34

3

2.07

23/01/2009

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Markit Structured Finance Research

BBB EABCDS Sector Analysis (P UF + Running fee of 100 bps) PUF (%) 100 95 90 85 80 75 70 65 60 55 50 45

Jan 15th

40 35 30 25 20 15 10 5 0 UK BBB PRMBS

Spanish BBB RMBS

Granite BBB

UK BBB SPRMBS

The primary market remained calm again this past week:

Primary Market Deal

C ountry/Sector

Class

Av Rating

Spread (bp)

Amount (€ mn)

Isin

Finis Mortgages 2008

R ussian/RMBS

A

A

750

108 XS0406566934

Fundus Mortgages 2008

R ussian/RMBS

A

A

750

108 XS0406575174

Belgian Lion RMBS 1

Belgian/R MBS

A

AAA

140

4,816 BE0002383553

B

n.r

300

515 BE0002384569

A

AAA

40

608 ES0358968008

Loan B

n.r

55

197 n.a

Madrid Residencial 1

Spanish/RMBS

Cash ABS spreads in most European sectors tightened, likely driven by long investors. The Dutch cash RMBS market tightened to 350 basis points from 375 basis points.

The UK government continued its attempt to increase confidence among ABS investors. After coming close to nationalising some of the largest British banks, the government is in the process of implementing guarantees for particular AAA RMBS. The government is effectively playing the role of a monoline insurer. Tranches that benefit from these guarantees should begin pricing more closely in line with UK government yields.

The Bank of England will also launch a £50 billion fund to purchase ABS and other debt instruments. The terms of the current liquidity scheme will be revised by the end of the month to include better medium-term financing. By injecting liquidity directly into the mortgage market, the government hopes to again buoy the ABS market should house prices recover.

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3

Markit Structured Finance Research

European AAA RM BS (3-5yr WAL)

European AA RM BS (3-5yr WAL) Spread (bp) 2,400 2,200 UK SPRM BS UK PRM BS 2,000 Spanish RM BS Dutch RM BS 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08

Spread (bp) 1,400 1,200 1,000 800

UK SPRM BS

UK PRM BS

Spanish RM BS

Dutch RM BS

Italian RM BS

Irish RM BS

Portuguese RM BS

French RM BS

Australian RM BS

600 400 200 0 Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

European A RM BS (3-5yr WAL)

Aug-08

Oct-08

Dec-08

Aug-08

Oct-08

Dec-08

Oct-08

Dec-08

European BBB RM BS (3-5yr WAL)

UK SPRM BS

UK PRM BS

7,000

UK SPRM BS

UK PRM BS

Spanish RM BS

Dutch RM BS

6,000

Spanish RM BS

Dutch RM BS

3,200 2,800

Dec-08

Spread (bp) 8,000

Spread (bp) 3,600

Oct-08

2,400

5,000

2,000

4,000

1,600

3,000

1,200

2,000

800

1,000

400 0 Oct-07

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

0 Oct-07

Dec-08

Dec-07

Feb-08

Jun-08

UK P RM BS AAA

European CM BS (3-5 yr WAL) Spread (bp) 3,200

Spread (bp) 3,200 2,800

Apr-08

CM BS AAA

CM BS AA

Holmes M aster Issuer PLC 2006 1 3 A2 EUR

2,800

Perm M aster Issuer plc 2007 1 2007-1 3A EUR

2,400

2,400

Granite M aster Issuer plc 2007-2 3A2 EUR

2,000

2,000

Aire Vy M tgs 2005 1 plc 2 A2 EUR

1,600

1,600

1,200

1,200

800

800

400

400

CM BS A

0 Oct-07

Dec-07

CM BS BBB

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

European Auto Loan/ Equipment Lease ABS Spread (bp) 2,400 Auto Loan AAA (1-4 yrs) Auto Lease AAA (1-4 yrs) 2,200 Equip Lease AAA (1-4 yrs) Auto Lease A (1-4 yrs) 2,000 1,800 Auto Loan BBB (1-4 yrs) Equip Lease BBB (1-4 yrs) 1,600 1,400 1,200 1,000 800 600 400 200 0 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08

23/01/2009

0 Oct-07

Dec-08

Dec-07

Feb-08

Apr-08

Jun-08

European Credit Card ABS Spread (bp) 3,200 Credit Card AAA (1-4 yrs)

2,800

Credit Card A (1-4 yrs)

2,400

Credit Card BBB (1-4 yrs)

2,000 1,600 1,200 800 400 0 Oct-07

Dec-08

4

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Markit Structured Finance Research

The European Central Bank’s new risk control measures will come into force on February 1, 2009 with the following haircuts applied

Levels of valuation haircuts applied to eligible marketable assets in relation to fixed coupon and zero coupon instruments (percentages) Liquidity categories Category I

Category II

Category III

Category V (ABS)

Category IV

Residual maturity (years)

Fixed coupon

Zero coupon

Fixed coupon

Zero coupon

Fixed coupon

Zero coupon

Fixed coupon

Fixed or zero coupon

Zero coupon

0-1

0.5

0.5

1

1

1.5

1.5

6.5

1-3

1.5

1.5

2.5

2.5

3

3

8

8

3-5

2.5

3

3.5

4

4.5

5

9.5

10

5-7

3

3.5

4.5

5

5.5

6

10.5

11

4

4.5

5.5

6.5

6.5

8

11.5

13

5.5

8.5

7.5

12

9

15

14

20

7-10 >10 Source: ECB

23/01/2009

5

6.5

12-16.4

Markit Structured Finance Research

Appendix 1: ABS Performance Highlight: Portuguese RMBS

With the majority of attention turned towards to UK RMBS, in particular some of the large Master Trust structures, do investors in other jurisdictions have any worries around the corner? We highlight the performance of two distinct Portuguese deals from the same issuer with varying vintage: Magellan Mortgages No. 2 Plc, issued in October 2003, had an initial 22,979 mortgage loans for a value of €1.05 billion and an LTV ratio of 65.67 percent Magellan Mortgages No. 4 Plc, issued in July 2006, had an initial 23,006 mortgage loans for a value of €1.59 billion and an LTV ratio of 76.48 percent

Delinquencies - 90 Days + %

90 Days+%

5 Magellan Mortgages No.2 plc 4

Magellan Mortgages No.4 plc

3

2

1

0 Aug-03

Feb-04

Aug-04

Feb-05

Aug-05

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Delinquency levels over time for these deals have increased steadily. However, neither deal is nearing percentage levels of great concern. Both deals have portfolio trigger events of 90 to 365 days and trigger percent delinquencies at 4.50 percent. Both are currently at around the 1.00 percent level. Of these delinquent loans, Magellan 2 has 111 in legal proceedings while Magellan 4 has 72 at this stage.

Fundamental performance data shows the strong performance of these deals. Reserve funds are untouched, and the relative cover of the funds over the outstanding collateral balances has increased as the deals continue to pay down with no problems.

Losses for the funds are also no cause for concern. The earlier vintage has suffered no losses at this stage. Magellan Mortgages 4 Plc had suffered a small amount of deemed principal losses, which were subsequently covered by the excess spread, accounting for realised loss of €0.

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Markit Structured Finance Research

Magellan Mortgages No.2 plc Report Date

Reserve Fund

Magellan Mortgages No.4 plc

Reserve Fund % of Pool

Losses

Reserve Fund

31 August 2003

9000000

0.855

0

31 December 2003

9000000

0.918

0

31 March 2004

9000000

0.940

0

30 June 2004

9000000

0.962

0

30 September 2004

9000000

0.986

0

31 December 2004

9000000

1.011

0

31 March 2005

9000000

1.037

0

30 June 2005

9000000

1.037

0

30 September 2005

9000000

0.903

0

30 December 2005

9000000

0.903

0

31 March 2006

9000000

1.170

0

30 June 2006

9000000

1.204

0

Reserve Fund % of Pool Losses

30 September 2006

9000000

1.241

0

13500000

0.921

0

31 December 2006

9000000

1.284

0

13500000

0.905

0

31 March 2007

9000000

1.355

0

13500000

0.966

0

30 June 2007

9000000

1.457

0

13500000

1.012

0

30 September 2007

9000000

1.612

0

13500000

1.142

0

31 December 2007

9000000

1.709

0

13500000

1.223

0

31 March 2008

9000000

1.783

0

13500000

1.278

0

30 June 2008

9000000

1.937

0

13500000

1.335

84,229

30 September 2008

9000000

2.010

0

13500000

1.380

84,229

31 December 2008

9000000

2.095

0

13500000

1.424

213,405

Portuguese RMBS shows robust performance in a time where other areas are requiring increasingly close scrutiny.

Despite this normal performance, the most senior securities from these two deals have traded in the 500-550 basis points area, greatly affected by the widening in September-December 2008 across European ABS.

M agellan M tgs No 2 plc 1 A EUR Spread (bp) 550 500 450 400 Spread Bid 350 300 Price Bid 250 200 150 100 50 0 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08

M agellan M tgs No 4 plc 1 A EUR Spread (bp) 550 500 450 400 Spread Bid 350 300 Price Bid 250 200 150 100 50 0 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08

% 100 98 96 94 92 90 88 86 84 82 80

Dec-08

Philippe Pagnotta

David Bruce

ABS Analyst, Structured Finance

ABS Analyst, Structured Finance

Markit

Markit

Tel: +44 20 7260 2214

Tel: +44 20 7260 2112

Email: [email protected]

Email: [email protected]

For more information on Markit's ABS products, please contact: [email protected]

23/01/2009

7

% 100 98 96 94 92 90 88 86 84 82 80 78 76

Dec-08