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for press only Investment View Asset Backed Securities offer investors protection against a “normalisation” of interest rates and inflation 31 May 2017 | Author: Calvin Davies, Head of ABS and Covered Bonds at NN Investment Partners The Floating Rate nature of high quality European Asset Backed Securities is attracting increasing interest from investors concerned about the potential impact of any “normalisation” of interest rates and inflation as European Central Bank “tapering” draws closer. Debt markets face a number of difficult challenges this year, with investors bracing themselves for future tapering by the European Central Bank (ECB), while inflation and interest rates are expected to rise in the US and in Europe over the longer term. However, Asset Backed Securities (ABS), which are bonds backed by collateral such as residential mortgage loans, consumer loans, loans to small- and medium-sized corporates, etc., are attracting increasing levels of interest as they offer investors something of a “safe haven” because their floating rate nature provides protection against rising interest rates and inflation. In the present market environment, where the yields on many fixed income asset classes are low and in some cases even negative, investors are increasingly considering European ABS as an attractive alternative to more traditional fixed income categories. Many investors are concerned about the “normalisation” of interest rates and inflation in the medium term and, in order to mitigate the impact of this, they are seeking exposure to good quality investments with a floating interest rate, such as European ABS. Despite the consistently strong fundamental performance of ABS in Europe, the asset class is still either unloved or unknown by certain segments of the investor universe. This is one of the reasons why it still offers a yield pick-up compared to more traditional fixed income asset classes with a similar risk profile. The yield pick-up, together with the floating rate coupon, is proving to be an attractive combination in the current market environment. ABS spreads have been moving tighter, but the asset class still offers attractive relative value versus similarly rated investments in other fixed income asset classes such as Sovereign Bonds, Corporate Bonds or Covered Bonds. The graphs below show generic yield comparisons in order to illustrate the difference in yield between ABS and other comparable asset classes. Source: Bloomberg. Date: 23-05-2017 Although issuance levels have not as yet regained the levels seen before the Credit Crisis, the European ABS market has seen a number of positive developments in recent years as the industry has moved toward greater transparency and standardisation: Regulatory initiatives supporting improved market practice, notably: Improved alignment of interest through risk retention (“skin in the game”) by the originating mortgage bank or finance provider. Provision of loan level data on the underlying collateral via the European DataWarehouse. Prime Collateralised Securities (PCS) introduced in 2013 to provide quality kite-marks for transactions focus on transparency, quality of collateral & reporting. Tighter criteria at the rating agencies, resulting in more robust structures. Eurosystem (the combination of the ECB and the various National Central Banks across the Eurozone) endorsement of, and support for, the asset class via their ABS Purchasing Programme. Also, there are initiatives by European regulators that are positive toward the asset class: Efforts to revise/harmonise the current EU regulatory framework for securitisation form a key part of the European Commission’s Capital Markets Union initiative. The European Commission is seeking to deliver as much as EUR150bln of new lending and to diversify funding sources for borrowers traditionally reliant on the banking sector. Nonetheless, investing in the ABS market requires specialist expertise and experience. ABS is a credit product, and investors are therefore subject to credit risk, as well as potential market/price volatility. Historical credit losses generated by European ABS have been very limited, and credit performance has been positive. Despite this, it is important to have a thorough understanding of the underlying pool of collateral, the business model of the originating mortgage bank/finance provider, and the structure of an individual transaction. Moreover, it is crucial to understand the dynamics involved in this particular part of the fixed income market. ENDS Disclaimer This communication is intended for press use only. This communication has been prepared solely for the purpose of information and does not constitute an offer, in particular a prospectus or any invitation to treat, buy or sell any security or to participate in any trading strategy or the provision of investment services. While particular attention has been paid to the contents of this communication, no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof. Any information given in this communication may be subject to change or update without notice. Neither NN Investment Partners B.V., NN Investment Partners Holdings N.V. nor any other company or unit belonging to the NN Group, nor any of its directors or employees can be held directly or indirectly liable or responsible with respect to this communication. Investment sustains risk. Please note that the value of any investment may rise or fall and that past performance is not indicative of future results and should in no event be deemed as such. This communication is not directed at and must not be acted upon by US Persons as defined in Rule 902 of Regulation S of the United States Securities Act of 1933, and is not intended and may not be used to solicit sales of investments or subscription of securities in countries where this is prohibited by the relevant authorities or legislation. Any claims arising out of or in connection with the terms and conditions of this disclaimer are governed by Dutch law. Press contacts: Caroline Wroblewski T +31 70 378 1281 M +31 6 30485111 E [email protected] Marlie Zuidgeest T +31 70 379 1314 M +31 6 21494952 E [email protected] About NN Investment Partners NN Investment Partners is the asset manager of NN Group N.V., a publicly traded company listed on Euronext Amsterdam. NN Investment Partners is head-quartered in The Hague, The Netherlands. NN Investment Partners in aggregate manages approximately EUR 194 bln* (USD 208 bln*) in assets for institutions and individual investors worldwide. NN Investment Partners employs over 1,100 staff and is active in 15 countries across Europe, U.S., Latin America, Asia and Middle East. NN Investment Partners is part of NN Group N.V., a publicly traded corporation. * Figures as of 31 March 2017