Insights

As we pass the halfway mark of 2024, the UK, and European asset-backed securities (ABS) markets continue to demonstrate robust performance and resilience. We review H1 2024 here and expectations for the rest of the year.

Positive Sentiment and Market Dynamics

The ABS sector has benefitted from a favourable macroeconomic backdrop, contributing to positive sentiment. The persistence of the soft-landing narrative and limited volatility compared to recent years have bolstered confidence for all market participants. Supply demand dynamics have brought spreads in consistently, we look to add selectively where we see risk reward distinguishing between collateral asset classes and positioning in the capital structure.

Record Issuance Levels

2024 has witnessed unprecedented issuance levels in the ABS market since the Global Financial Crisis (GFC). European ABS and Residential Mortgage-Backed Securities (RMBS) issuance have exceeded €52 billion, and European Collateralized Loan Obligations (CLOs) have seen substantial new issuances amounting to €25 billion. The overall issuance forecast for 2024 stands at €100-110 billion, with the first half of the year being particularly strong due to issuers front-loading their funding activity amid potential macroeconomic and geopolitical risks anticipated in the latter half.

Supply Trends and Performance

Traditional UK Prime RMBS lenders have returned to securitisation, seeking to diversify funding sources post-withdrawal of central bank funding schemes. Consumer asset classes, especially autos, have experienced a particularly strong year but conversely, the UK non-conforming (NC) and buy-to-let (BTL) sectors have slowed, primarily focusing on refinancing existing deals due to muted demand for mortgage products following the LDI crisis.

Credit performance across most sectors has remained relatively stable despite higher interest rates and inflation. Borrowers have been supported by wage growth, stable unemployment, and asset price stability. However, the UK non-conforming and UK Buy to let RMBS sector have shown performance deterioration, driven by legacy floating-rate collateral from the pre-GFC era. Borrowers who have not been able to refinance away in arising rate environment, have faced significant payment shocks. Performance metrics have suffered and has led to recent bond downgrades by rating agencies.

Strong Technical theme and Market Resilience

The ABS market continues to benefit from significant primary issuance volumes and diverse supply, tightening spreads have reduced funding costs for Originators. Despite strong supply, the demand side for paper remains elevated and we still see negative net supply for some sectors. The ongoing supply-demand imbalance has been a primary driver of ABS valuations, with weighted average coverage ratios for Eurozone and UK senior bonds at 1.8x, and even higher at 4-5x on average, for non-senior bonds.

H2 2024 Outlook

Looking ahead, the performance outlook for most collateral types remains stable, although we remain mindful of our expectations for rates being higher for longer.

The strong demand for ABS is anticipated to continue driving valuations; despite potential macroeconomic volatility, the sector’s resilience and a stable investor base are likely to sustain its positive trajectory.

In conclusion, the UK and European ABS markets have shown impressive strength in the first half of 2024. As we move into the second half of the year, cautious optimism is warranted, with a focus on evolving macroeconomic conditions and geopolitical developments. The sector’s ability to navigate these challenges will be crucial in maintaining its robust performance and investor confidence.