European Dealers Brace For 'Bad Bank' Collateral
Total Securitization - http://www.totalsecuritization.com
14 Jun 2011
European dealers are expecting a raft of legacy asset-backed securities to hit the market in the next six to 18 months as collateral from the so-called "bad banks" is sold and more retained deals shake loose from the European Central Bank's liquidity facility, traders at Global ABS said.
Rehan Latif, executive director at Morgan Stanley, said he is expecting retained ECB deals to be rolled out at new levels soon. "We are very conscious of this," he said at the trader's roundtable, "Liquidity Challenges In Secondary ABS Market." "We will see a lot more portfolio unwinds."
Rohit Hendev, director at Citigroup, agreed, saying the market is already anticipating the overhang. "We will position ourselves accordingly," he said, noting European ABS spreads have held recently, despite revived talks to "restructure" Greece's sovereign debt.
The traders cast a cautious eye on U.S. spread levels, which saw widening in the secondary market amid sovereign worries and the Federal Reserve Bank of New York auction of $30 billion in legacy American International Group collateral from Maiden Lane II. "Our market has corrected, but the U.S. market has corrected much more significantly," Latif said. "We shifted down [only about] two or three points."
Craig Tipping, managing director at Jefferies, noted the ability to hedge is among the most important qualities to maintain during periods of market turmoil. "When the market turns, like it is now, one lesson going out of the crisis is that [markets are] less liquid," he said.
Khilan Shah, ABS trading at Nomura International, said while new U.S. entrants to the European secondary market, such as hedge funds, have helped drive trading flows in the post-crisis environment, dealers are ultimately responsible for providing clients with liquidity. "We are the market makers-giving the ability to allow clients to buy and sell," he said. "The best hedge is the ability to sell."
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