* Granite call fuels worries over euro liquidity
* UK issuers could fill supply gap in euro RMBS
* Some euro investors expected to exit the space
By Mariana Ionova
LONDON, Dec 17 (IFR) - The euro RMBS sector could face further pressure in the weeks ahead, as 4.5bn of Granite cash starts flowing back into a market already squeezed by too many bids chasing too little paper.
As investors prepare for the call of the legacy Northern Rock paper, concerns are growing over how the cash will be redeployed.
The UK government sold the £13bn portfolio to Cerberus in November, paving the way for the call of outstanding notes and the potential resecuritisation of the underlying assets.
The Granite notes, of which about £7.8bn are outstanding, are set to begin redeeming on December 17 and will be fully repaid by December 20.
The trust contained some 4.5bn, US$3.8bn and £1.98bn in outstanding notes as of October 15.
While the sterling market saw some relief last week, when Kensington Mortgages soaked up about £1.5bn with its print, sluggish euro RMBS issuance has fuelled concerns over a liquidity glut in the currency.
“We haven’t seen very much issuance in the euro RMBS space and getting 4.5bn on December 20 is a lot of cash,” one ABS trader said.
“Going into next year, there will be a reasonable amount of euro to put to work and spreads will probably reflect that.”
While the extra cash will be supportive for the market, some sources say excessive tightening could lead some euro investors to swap RMBS with other securities or leave structured finance entirely.
Most dollar investors are also expected to leave the market, traders noted.
One banker noted a chunk of the notes will be repaid to legacy holders who do not plan on remaining in the market. But it’s still unclear how many will be euro investors chasing replacement paper in an increasingly competitive environment.
“It’s difficult to say exactly how much of this will recycle into new investment,” the banker said. “This has been one of the big questions throughout this whole Granite process.”
While European RMBS primary activity has been strong this year, it has mostly been sterling issuance.
Dutch issuers, traditionally the source of most euro-denominated supply, have printed just 5.9bn in RMBS notes so far this year, IFR figures show.
This compared to issuance of 8.8bn in the same period the previous year.
The last Dutch trade to hit the market was the 550m Hypenn RMBS IV in September. The deal priced 2-year notes at 28bp and 4.8-year paper at 42bp.
Traders said Dutch RMBS notes have been nearly absent from the secondary market in recent weeks, with European Central Bank buying earlier in the year squeezing spreads into the low to mid 20s area.
“With euro RMBS, it’s tough because there’s a heck of a lot less of it than sterling RMBS,” one investor said. “And then the ECB soaks up a good portion of what does get done in that space.”
Part of the gap left by Dutch deals this year has been filled by UK RMBS issuers, eager to tap into the much deeper euro investor pool.
In October, the Bank of Scotland used a multi-currency structure to clear its £2bn Permanent trade. Shortly thereafter, TSB Bank printed euro and sterling tranches as part of its debut Duncan 2015-1 deal.
Sources say they expect more euro UK issuance in 2016, which may help soak up some of the cash supply while also alleviating the pressure on sterling liquidity.
But swapping sterling into euros comes with a price tag that not all issuers can take on. The costs associated with a cross-currency swap between the two are now about 20 to 25bp, the investor said.
“It can be expensive, depending on how you hedge it out,” he said. “So an issuer is going to have to price a euro deal that much inside where a sterling deal would get done for the economics to work out.”
Tightening spreads could also lure more issuers to the market next quarter, which sources say may ease some of the liquidity pressure.
Although the Cerberus portfolio is now expected to be recycled into the market next year, it is still unclear in what shape or size it will re-emerge.
“It doesn’t look like there will be any securitisations coming out of Cerberus until potentially late into Q1 or Q2 at least,” a syndicate banker said. “And investors are starting to look elsewhere for opportunities to put money to work.” (Reporting by Mariana Ionova. Editing by Alex Chambers and Julian Baker.)