“The view of Italian residential mortgage-backed securities from 30,000 feet is bad—the economic and political situation, as well as the lengthy foreclosure process, do not paint a rosy picture—but the view from the ground shows there are lots of truffles to be found among the poisonous mushrooms,” said Ratul Roy, a London-based analyst at Citigroup, the third-biggest arranger of asset-backed bond issues this year, according to research company Dealogic.
With senior tranches of Italian home-loan bonds yielding an average 150 basis points to 200 basis points more than comparable U.K. and Dutch prime RMBS, the debt has more room to rally if a recovery in Europe causes credit spreads to narrow, said Roy. Europe exited its longest ever recession in the second quarter and posted further growth in the third quarter, according to data compiled by Bloomberg.
The securities also benefit from relatively short maturities that help protect investors from large mark-to-market swings should credit spreads widen, said Roy. Italian mortgages typically range from 15 years to 20 years compared with an average 30 years in the Netherlands, he said.
Securities with a weighted-average life of three years to six years yield between 2.5% to 4% and most Italian RMBS bonds have an average tenor of less than five years, according to Roy. U.K. prime RMBS with a similar weighted-average life pay 1.7% to 2.5%.
About 80% of Italian RMBS currently held by investors is ranked AA by at least one ratings company, two levels below the highest AAA rating given to almost all senior tranches of Dutch and U.K. RMBS, according to Roy.
Banks create asset-backed securities by pooling consumer and property loans into notes, which typically allow lenders to raise capital more cheaply than by issuing unsecured debt.