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Calling a bottom in Spain

Is the worst over for Spanish mortgage defaults? That’s one way to interpret Santander’s offer to buy back up to 16.5 billion euros of its outstanding asset-backed debt.

The securities are trading below par – more than 40 percent in some cases before today’s announcement – allowing the bank to reduce debt by buying them back. Cash-rich banks such as HSBC have launched similar buybacks this year to profit from the ABS market dislocation, but it’s the first time a Spanish bank has launched such a large public buyback.

Santander has offered to pay slightly more than market prices, suggesting it thinks there is some money to be made by buying these bonds at beaten-up prices and waiting for the mortgages to pay off.

The buyback could also be a sign Santander believes the freeze in the European securitized debt markets is thawing.

from Neil Unmack:

UK mortgage debt: remain calm! All is well!

That's the message given by Moody's today on the resilience of UK mortgage-backed securities to the current downturn. The survey is based on so-called master trusts, a kind of securitization vehicle first applied to U.K. mortgages about a decade ago which quickly became the most efficient way for a large bank to securitize home loans. The master trusts grew so big that they now finance about a fifth of all UK home loans (although a large chunk of this must have been from deals issued by banks after the credit crisis to use as collateral for borrowing with the central banks).

Master trust bonds haven't been immune to the credit crisis. Forced selling by SIVs and funds caused yields on AAA master trust securities to gap out sharply from their low of around a tenth of a percentage point over Libor. Spreads have rallied in recent months, but they are still around 2 percentage points over Libor, largely because many asset managers simply won't touch illiquid asset-backed debt, even if the returns are much higher than equivalent corporate bonds.