Asset Backed Securities

Our analysis indicates European ABS investors can carry forward little concern about nasty default surprises, and this is likely to be important when considering total returns for 2021.

At the moment CLO spreads are tightening, as they are right across credit. However, we haven’t had any CLO primary deals come to market so far in 2021, so we are operating in a bit of an informational vacuum, at which point these cross-asset class comparisons can be useful.

Elena Rinaldi looks back at the performance of European CLOs in 2020 and explains how post-vaccine sentiment should help boost recovery in 2021, providing a positive outlook for CLOs.

So while we certainly expect unemployment to increase across Europe, and we expect more borrowers will fail to pay their mortgages, we believe current mortgage performance is very far away from a level that would threaten coupon and principal payments in the major European RMBS markets.

One of the legacies of Europe’s post-crisis lending landscape was a huge retrenchment in risk appetite, amplified by a lack of bank capital and in some instances funding for an extended period of time.

Overall CLO and loan performance have exceeded our expectations, though there are still plenty of headwinds for the market, chief among which is the prospect of further lockdowns and more economic disruption as Europe battles a second wave of COVID-19 cases.

European collateralised loan obligations – or CLOs – are bonds issued to fund a specific and diverse pool of corporate loans to firms of different sizes and in different industries all over Europe.

There are still plenty of potential bumps in the road (Brexit, the US election, COVID-19 developments and so on) but the positive technical created by dwindling supply has the potential to push spreads tighter in coming months.

We expect September to be relatively busy with new ABS deals, but there’s a very strong technical developing in favour of ABS and CLOs, which should help performance in the coming months.

If floating vs. fixed is no longer the most pressing question, then investors should be more focused on where they get the best credit spread.

The dust is beginning to settle in the UK economy, and we have been busy using granular RMBS data to assess the impact of mortgage payment relief (payment “holidays”), which the Financial Conduct Authority guided lenders to offer borrowers affected by COVID-19.

In the past few weeks CLOs have become the focus of much attention, both from market participants and the media, especially following the negative rating actions that agencies have taken on the underlying loans as well as CLO tranches.