Banks rush to maintain ECB repo-eligibility

The ECB extended its minimum two ratings repo-eligibility requirement to all existing ABS on 1 March. Some banks appear to have rushed their preparations, however, with one in five deals failing to meet the deadline.

Asset-backed analysts at RBS indicate that the outstanding volume of single-rated retained euro-denominated ABS stood at just over €200bn (accounting for some 237 bonds), as at 24 February, or around 30% of the total amount of retained ABS outstanding. Banks in Italy, Spain and the Netherlands accounted for over 70% of this stock.

Under the ECB's criteria, bonds must now have at least two ratings of triple-A at launch and maintain a rating of at least A3/A- or higher until maturity. The analysts estimate that as much as €85bn worth of retained ABS bonds gained additional ratings in the three business days between 22 and 25 February, with some €36bn of retained paper sourcing additional ratings the previous week.

Fitch, for one, says it received most ECB-related rating requests in 4Q10 - although some came in as late as January. Since the agency rates them as if they are new deals, the process takes 6-8 weeks and sometimes longer.

Fitch's head of European structured finance Marjan van der Weijden suggests that some sponsors may have underestimated how many different parties would need to be involved or perhaps expected the deadline to be extended. "Most sponsors that failed to meet the deadline have accepted that it's too late and will probably take the deals temporarily out of their ECB portfolio until the second rating is assigned. Others will still go through the process in the coming months in case they need to access repo facilities in the future," she adds.

Most of the restructurings undertaken to comply with Fitch's rating criteria involved updating legal or counterparty documentation. In some cases, the deals weren't performing well, so the senior notes were retranched. Generally the transactions benefitted from additional credit enhancement that had built up from launch.

Van der Weijden notes that Fitch's ratings pipeline still has a substantial component of regulatory-driven ratings, with the remainder being new issues. "We are hoping the ratio will be more like 50/50 this year, but southern European countries continue to remain heavily reliant on repo."

ABS strategists at UniCredit warn that more than 3% of currently eligible outstanding exposure (accounting for 58 tranches) is close to breaching its single-A minus assessment and thus may lose eligibility in the future. Spanish exposures look especially at risk, with some €90bn (accounting for 252 tranches) at the cusp, compared to €69bn of Italian and €41bn of Dutch exposures.

Meanwhile, banks with single-rated retained securitisations outstanding that aren't seeking a second rating have two other options to consider, according to the RBS analysts. First, they could restructure them to allow for placing or syndication into the investor base - though the depth and clearing price of primary demand would be key considerations. Second, they could tap the private market using their retained ABS.

While a few issuers can be expected to test the first alternative, the second option would likely appeal in cases where a second ECB-compliant rating is unattainable without uneconomic structural support or credit enhancement. The analysts point out that most Greek securitisations fall into this category, with a number of Irish bonds also likely to face such risks in the coming months, given sovereign and/or seller rating ceilings.

ABS utilisation at the ECB liquidity window spiked from €109bn in 2006 to €488bn as at 3Q10, or from 11% to 24% of total collateral posted.

CS