Draghi's Asset-Backed Revival Forecasts Tempered for 2016

Optimism is giving way to realism in Europe’s asset-backed debt market as analysts who predicted a jump in sales of the notes in 2015 because of Mario Draghi’s purchases of the debt scale back their expectations for 2016.

Deutsche Bank AG is forecasting 90 billion euros ($95 billion) of issuance next year, which is also the top end of JPMorgan Chase & Co.’s expectations, while Morgan Stanley sees 76 billion euros of sales. The three firms predicted between 95 billion euros and 100 billion euros of issuance in 2015, overshooting actual sales by as much as 17 billion euros.

“Our hopes for a primary revival this year proved overly optimistic," Morgan Stanley analysts led by Srikanth Sankaran wrote in a note to clients on Dec. 2. “Our expectations for 2016 are more grounded. The market’s biggest challenge is the lack of growth – in terms of outstanding volumes, investor base and market makers."

Transfer Risk

Traders and investors that interpreted European Central Bank President Draghi’s public endorsement of asset-backed debt as a sign the ECB would buy up swathes of the market were underwhelmed by the central bank’s first year of purchases. Draghi sought the revival of the ABS market, which shrunk by more than a quarter in the past two years, because the securities allow banks to transfer risk to investors and can encourage lenders to offer more credit to companies.

Sales of ABS, which bundle individual loans such as mortgages, auto credit and credit-card debt into tradeable bonds, totaled 83 billion euros in Europe so far this year, up from 82 billion-euros in 2014, JPMorgan data show. While that’s the most since 2007, it’s a fraction of the 532 billion euros sold in 2006, the busiest year for sales.

“In a year where the ECB was supposedly acting as a new marginal buyer, volumes disappointed,” Deutsche Bank analysts led by Conor O’Toole wrote in a Dec. 2 note to clients. “It is fair to say that the ECB is unlikely to deviate from being a bit part player.”

ECB Purchases

The central bank has acquired 15.2 billion euros of asset-backed notes since November 2014, making it the smallest part of the 598 billion euros spent under an asset-buying program. The ECB’s covered-bond purchases total 137.8 billion euros.

Yield premiums have increased for most notes. The average spread for senior-ranking Italian residential mortgage-backed securities that qualify for the ECB’s purchase program rose 30 basis points to 101 basis points this year, while spreads on ineligible collateralized loan obligations rose 23 basis points to 155 basis points, JPMorgan data show.

“We toned down our enthusiasm about the impact of the ECB’s ABS program once we realized its philosophy was not to be a driver of prices, but instead to trade in line with the market,” said Morgan Stanley’s Sankaran. “In some ABS asset classes this has meant the funding economics have shifted away from securitization, resulting in reduced issuance.”

Deutsche Bank and Morgan Stanley, as well as Citigroup Inc., expect U.K. residential mortgage-backed securities, collateralized loan obligations and auto credit debt will be the biggest sources of new deals in 2016.

“The European securitization markets remain neither broken, nor fully functional,” JPMorgan analysts led by Gareth Davies wrote in a Nov. 25 note. “They operate largely on auto-pilot. We believe it will require a significant jolt to move the market out of its current stupor.”

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