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TwentyFour - The Worst of Times or the Best of Times

Wednesday, August 09, 2017

TwentyFour - The Worst of Times or the Best of Times

The summer slowdown has seen a period of reflection here at TwentyFour AM, with Gary writing a blog a couple of days ago looking back over the course of his 30 year career, at changes in politics, markets and the value of football players. He was last seen in a side office moaning about “kids these days” and flicking wistfully through his collection of Duran Duran albums. Rob has also written about times when trading meant wearing a garish jacket, waving your hands wildly and shouting at people.


30 years is indeed a long time, but so is 10 years, and 10 years ago today was when BNP froze activity on three funds that invested primarily in US mortgage backed securities. The funds had collapsed in value from $2.8bn to $2.2bn in a couple of weeks, and BNP blamed market liquidity for the decision to stop redemptions.


As we all know these events were part of the start of the global financial crisis that swept through all markets, claiming notable scalps along the way – including Bear Stearns, Lehman Brothers, HBOS and Greece – and leading to the extraordinary central bank action we still experience. Further reaching effects were felt socially, and notably in politics, particularly with the rise of populist movements.


So if the first effect of this was felt in the ABS market, how has that market performed in the intervening years?


There is a massive amount of data we could look at, but the source we usually turn to for European ABS performance is Fitch’s annual Structured Finance Losses publication, the most recent of which covers the market’s performance up to the end of 2016.


We can look at performance of deals originated in 2007 and before (i.e. 2000-2007), and from 2008–2016 and can see how much of these markets have redeemed (either in full or part amortised), and how much has defaulted already. From this we should be able to see whether there is a difference between the pre-crisis bubble markets, and the post-crisis market where both the underlying lending markets and the securitisation markets have been more closely regulated.


The ABS market (including asset classes such as credit cards, student loans, auto loans etc.) of pre-crisis deals has realised 60bps of losses on the 2007 vintage only. All other years are loss-free.


The 2008 and later data has experienced a 30bps loss on the 2008 vintage and nothing else.


In total the pre and post-crisis data has a total loss rate of 4bps.


On a more granular level, that is a 0% loss on AAA-BBB bonds, and a 4.6% on BB and lower rated bonds, when using their rating at origination.


For the biggest part of the European market, RMBS, the story is better by vintage – loss rates of 0% with the exception of 3bps on 2007 deals, making the cumulative loss across all years as being as near to 0bps as possible.

That breaks down as being 0bps on AAA-BBB original rating bonds, and 0.7% on HY bonds.


For investors who have heard us talk about European ABS before this might not be a surprise, but when you put this performance in the context of defaults in other parts of the market, then the excellent value on offer in our market is hard to question.

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