Asset-backed securities weather the storm, says Henderson GI

Investors are ignoring the fact that European asset-backed securities market is weathering the credit storm, says Ed Panek, head of ABS Investment, Henderson Global Investors.

“During the course of the global financial crisis, certain misconceptions regarding ABS have become entrenched in investors’ attitudes towards the asset class,” keeping them away from the sector, says Panek in a note.

Spreads for prime and high quality ABS remained relatively unchanged, except for top of the capital structure CLOs, with demand holding up well, he says.

This comes at a time of depressed global credit and equity markets. Increased volatility over the past several weeks has impacted broader risk asset markets, on concerns over worse than expected US non-farm payroll numbers, the widening of Spanish and Italian sovereign spreads, the political paralysis in Greece and uncertainty regarding continued support for austerity and the bail-out of the Euro.

Secondary market activity is down but stable, with several high volume bid lists fuelling a sizeable amount of the activity. The primary market continued to show resilience and a continuing diversity of asset classes relative to most of 2011.

The sector suffers from a number of misconceptions, says Panek. These include:

– ABS are risky securities which have experienced significant losses;

– The performance of the assets underlying ABS has been poor;

– ABS are illiquid securities;

– ABS returns are highly volatile; and

– ABS is a relatively small, niche market.

While some of these perceptions are accurate when applied to certain sections of the ABS market, once you dig behind the headlines it becomes clear that in many instances they are inaccurate, says Panek.

Not all ABS securities are risky, with European ABS securities having a default rate of 1.6% since 2007. Panek says: “No losses have been suffered by senior tranches of any European RMBS transactions to date. While certain senior ABS are expected to incur losses in time, overall loss rates are expected to remain low. Fitch estimates total projected losses on senior classes of European ABS will be approximately 0.2%.”

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