Wednesday, July 22, 2009

Savvy issuers, weary investors lead ABS buyback push

Posted on Reuters by Natalie Harrison:

Buybacks on beaten-up European asset-backed securities (ABS) are set to gather steam in the next few weeks, offering issuers the chance to pay down debt cheaply and investors a rare exit opportunity.

The last four months has seen 14 ABS tender offers amounting to 2.5 billion euros ($3.5 billion), according to Barclays Capital, across a broad spectrum of the market ranging from pub issues to those backed by commercial and residential mortgages.

After strong take-up rates from investors -- often as high as 100 percent on offers from the likes of Rabobank and HSBC -- confidence among issuers is growing and more are about to seize a chance to scale down their debt at deeply discounted prices.

"Issuers have found that they can take paper off the street in volume. I would be lying if I said we were not looking at a few," said one banker involved in a recent buyback offer.

"There is a window of opportunity for issuers to execute at price levels," which allows them to book gains by buying bonds at a steep discount to par, the banker said.

There is certainly scope for more, with an estimated 1.1 trillion euros of ABS still outstanding, Barclays said.

"Most people were even more skeptical a month ago and now we have had 14 tenders," said Hans Vrensen, head of securitization research at Barclays Capital.

"Many banks still have a significant amount of problems, but some banks do have cash to fund these tenders."


Just this week, Britannia Building Society completed the first buyback on a UK non-conforming issue and saw a 100 percent take-up rate on the 100 million pounds ($164.3 million) offer on its Leek residential mortgage-backed securities (RMBS).

The lender slashed about $38 million off its long-term debts by buying a number of transactions at a discount of between 71 and 80.5 percent of face value, a premium over market prices at about 40 to 50 percent of face value.

"The issuer has a natural arbitrage. It knows the risk on the deal better than anyone, and as far as extension risk is concerned, it is also in the driving seat in knowing whether or not it is going to call the bonds," said Arjan Verbeek, head of covered bond and ABS structuring at BNP Paribas.

On the other side of the deal, an investor that bought the bonds at par and has seen prices slide in an illiquid market, buybacks are an obvious way to get some money back.

"Liquidity has been horrendous in non-conforming, so if you can get 70 to 80 pence on something that has been bid as low as 40 or 50 pence, then this is a very attractive exit and you can put that money elsewhere," said Allen Twyning, a credit analyst at Aviva Investors.


The majority of buybacks have been on junior-ranked bonds where prices are most depressed and therefore offer greater potential for gains, particularly as issuers are experts on the underlying loans and associated loss risks.

The Britannia deal was an exception because the offer was restricted to the triple-A tranche, but there is potential that the same issuer or others could launch similar buybacks further down the capital structure, analysts and bankers say.

"At those lower levels, there are more economic gains for sponsors to crystallize because they are trading at more distressed levels," said the banker who declined to be named.

One of the stumbling blocks is that it is still difficult to establish firm pricing.

A recent mini-rally in RMBS spreads, largely driven by more volume in secondary market trading, may also reduce the potential gains to be made from a buyback. In CMBS (commercial mortgage-backed securities), however, spreads have not rallied quite so hard.

"Some investors may be willing to take a loss and get some of their money back, but the majority will think it is more worthwhile to hold onto the assets if they believe the securities will pay off over time," said Verbeek.

"I think we will see a few more, but I don't think there will be many successful buybacks," said Verbeek. "We have looked at some, but there was not enough interest."

No comments: