Another very constructive and busy day at Global ABS in Barcelona. There were many more people in evidence today and the ‘buzz‘ seemed pretty constructive given the most recent leg down in market sentiment.
Prytania had meetings with a range of issuers, from programmatic users of structured finance as a long-term funding tool, to relative newcomers looking for less liquid/early stage investment. Without exception, all see challenges ahead but no one is flagging credit performance as an immediate risk.
While interest rates will rise further, many issuers have not seen stress yet in their portfolios. Some originators are already adjusting their underwriting to consider the inevitable stress to come from higher interest rates and inflation while others fear to lose market share and want their competitor to be the first mover. The large platforms remain well capitalised and seem happy to utilise warehouse lines for longer rather than issue at current spread levels, reducing supply side pressure on pricing.
We are excited to see continued product innovation in Europe, which can help specific consumer and SME segments. Both groups of originators feel comfortable that they can manage the risk profile by small adjustments in lending criteria and pricing and weather current market conditions whilst maintaining current origination volumes. Nonetheless, not every originator targets a public securitisarion exit, so the need for longer term private capital remains strong.
In contrast, RMBS issuers were signalling a reduction in deals to be issued, partly due to their expected low volume of originations.
Opinions on BTL RMBS were relatively positive, with some issuers agreeing that the sector remains relatively hedged in terms of robust cash flows. In particular the argument was made that if financing costs increase, more first-time buyers will resort to renting thus sustaining demand to a degree.
On the CMBS side, there was still relatively bullish sentiment on last mile logistics built on strong fundamentals such as high occupancy and robust leases. Whilst this is true, yields are incredibly tight in this sector and we no longer see significant upside from this level of valuations.