More investor demand seen for RMBS

The positive news flow for the sector did not end there. Insto reported increasing interest among European investors in Australian RMBS, which would be a very significant development if the report proves to be accurate.

Australian RMBS issuance under Euro programs peaked at the equivalent of over A$14 billion in 2007 and was at similar levels in prior years. Moreover, issuance under global programs, which invariably included sizeable euro denominated tranches, peaked at almost the equivalent of A$26 billion in 2006.

There has been no issuance in either form since Bank of Queensland's Series 2008-1E REDS EHP Trust issue in April 2008.

Insto's report of increasing European investor interest in Australian RMBS may very well be accurate. European ABS spreads have tightened over the European summer, as the overhang of product being dumped by structured investment vehicles has finally been absorbed, and is expected to contract further, playing catch-up with corporate bond spreads.

And it is in this environment that Volkswagen announced its intention to launch the first ABS issue of auto-receivables in Europe in twelve months. There are few details on the issue as yet, but it is expected that it will follow the same format as Volkswagen's previous ABS issue in September last year - the last ABS issue undertaken in Europe.

That issue had a simple two-tranche structure: Class A, 'AAA' rated notes with a 1.4 year weighted average life; and Class B, 'A' rated notes with a 1.75 year weighted average life. The Class A notes priced at Euribor plus 90 bps.

This latest issue is expected to be launched after the completion of a European roadshow commencing next Monday.  The ABS are expected to be highly sought after by money market funds, with pricing on the Class A tranche expected to fall somewhere within a range of 120 bps to 170 bps over Euribor.

Continuance of AOFM-backed issuance seems likely but perhaps in a reduced form.