ABS: the brakes are off with the UK leading the way

In a particularly noteworthy start to the year, we have seen the UK take the lead in the ABS primary markets, with two UK master trust RMBS deals pricing in the first week of January, with one even being announced during the limbo period between Christmas and New Year. 

This is uncommon, as in previous years we have seen European auto ABS issuers opening the market. It is also the earliest we have seen a public issuance since 2020 when Storm, a Dutch RMBS deal from (Rabobank’s) Obvion printed €1bn of bonds on January 10.

On the second day of trading this year, we saw a £700m deal from Permanent Master Issuer (Lloyd’s). The deal was well covered and upsized from an initial offering of £500m. In quick succession, Holmes Master Issuer (Santander UK) printed £750m of notes, again well subscribed and upsized. Both issuers brought the deals at an initial talk of 57-58bps and priced at 55bps over the UK overnight interest rate (SONIA), levels that are consistent with 2023 deals from both issuers. It is also worth noting that we have seen a three-year UK prime deal announced from Lanark Master Trust (Virgin Money) this week, expected to price in the second week of January, and will help to shape the curve between a three- and five-year deal.

Simultaneously, as some investors are rotating into the new issue, we have seen similar paper trading in the secondary market, yet levels have presented tighter here. We have witnessed five-year UK prime paper trading at 45bps over SONIA, with shorter bonds trading in the low 40s, demonstrating an attractive new issue premium of 10-15bps available to those investors willing to make the switches. It is also a positive nod from the issuers in leaving some value on the table.

As we’ve previously said, we see the TFSME maturities during 2024 as a positive technical for UK supply, as issuers look at the RMBS market as an alternative cheap funding source. Now, with UK banks starting the year with a foot on the gas, it seems our predictions are taking shape.

We are seeing a healthy pipeline build in the ABS market, with UK RMBS and EUR consumer deals expected immanently, and anticipate CLO issuance to commence in the next few weeks. For reference, during 2023 we saw €8.1bn of UK prime and expect a jump to €12.5bn for the 2024 fiscal year. We welcome the active start to the year, seeing this as an attractive opportunity to pick up quality UK paper from benchmark issuers and hope to see the trend continue.