A European central bank is reportedly looking to take advantage of the recent bond market rally to offload something pretty special: Lehman-originated RMBS.
From Bloomberg:
The central bank of Europe’s largest economy [Germany's Bundesbank] hired Morgan Stanley and structured finance advisory firm AgFe Ltd. to manage the 823 million-euro ($1.2 billion) sale, said the people, who declined to be identified because the deal is private. Investors are being asked to bid on nine portions of notes Lehman created between November 2007 and August 2008, according to a list of the assets seen by Bloomberg News.
“A lot of investors refused to sell at distressed prices, but right now spreads are tightening and we might see some players starting to accept some bids,” said James Zanesi, a Munich-based credit analyst at UniCredit SpA.
There’s some contention as to whether it’s the ECB or the Bundesbank doing the sale. It’s probably a bit of a moot point anyway since, in Bloomberg’s words, the Bundesbank is part of the Eurosystem network, providing loans to banks under the lending programme overseen by the ECB.
What is interesting though, is that the sale is being billed by some analysts as a sort of test for the price of European central banks’ liquidity ops in recent years.
From Structured Finance News:
The bid list features Dutch nonconforming RMBS deals originated by Lehman Brothers subsidiaries and structured when the European ABS market had already collapsed. The bonds were repoed with the ECB by Lehman prior to going bankrupt.
“This sale will be a ‘test’ to quantify the implicit cost borne by central banks for providing liquidity,” UniCredit analysts said. “We also expect to see more sales as Lehman was not the only bank that defaulted after pledging collateral to repo facilities with the ECB.”
Which we think basically means that the market will be watching whether the central bank makes a profit or loss on the sale.
On that point, here’s a bit more detail from IFR Securitisation Report:
A trader reckoned that there should be interest as the unusually large sizes available are rarely seen and will clearly focus attention. Whether the ECB will avoid making a loss on the bonds is not known but it seems fair to assume that if it had valued them at par and deducted a 12% haircut, which would have been normal at the time they were repoed, a loss seems probable since the market value today is unlikely to exceed 88%.
The list is reportedly due to trade next week.
One to watch.
Related links:
Risky RMBS yields return to pre-Lehman levels – eFinancialNews
Record ABS use in repos as banks stay on ECB drip – Dow Jones (2008)
The ECB as `liquidity monster’ – FT Alphaville
Trichet on the ECB’s rubbish assets – FT Alphaville