Securitisation on steady course
Securitisation has become one of the hottest sectors of the European credit markets, supported by the single currency environment, greatly improved regulatory frameworks in most jurisdictions and increased investor appetite as yields in traditional investment sources like government and corporate bonds slump.
Despite recent global equity volatility, the European securitisation market had its strongest quarter ever in the first three months of 2001, with volumes soaring almost doubling, ending at $32.3bn (e36.8bn) as against $16.4bn in the same period a year earlier.
The market also notched up its strongest April ever with issuance more than three-fold higher than the same period a year earlier, ending at $13.37bn compared with $4.3bn.
Kurt Sampson, managing director at Standard & Poor’s Structured Finance Ratings (SFR) group, Europe does not expect global recessionary woes to put the brakes on European asset-backed securities (ABS) growth any time soon.
“Demand for European asset-backed bonds has never been so strong,” he says. “The market is continually finding new and innovative ways to apply securitisation technology and the origination and investor bases are still expanding. We’re expecting at least a 20% growth in 2001.”
In the purest form, securitised bonds, also called structured financings,are a form of secured lending. The bonds are repaid from the cash flow generated by a specific pool of assets like credit card receivables, mortgages and consumer loans that have been taken off balance sheet and packaged into a special-purpose bankruptcy-remote entity; the ultimate goal being a highly rated bond issuance supported by assets from a lesser rated (or unrated) company.
Originators have been motivated to securitise to improve both return on equity and shareholder value, as a balance-sheet management tool and to raise relatively cheap funding.
Investors have found comfort in the bonds’ flexibility, relative stability and better relative value vis-à-vis other bond categories with similar ratings and maturities.
The marked increase of published performance data has been another attraction for the investor base. S&P has played a key role in the developement of the market’s increased transparency through the publication of surveillance data on its web based credit analysis system, at www.ratingsdirect.com, explains Simon Collingridge, director of surveillance at the SFR group in Europe.
The dissemination of performance data has also provided a comfort cushion for those investors moving down the credit curve, which has been a strong theme of the market, he continues. “Market feedback suggests that demand for the lower-rated tranches has risen substantially, and those investors entering new territory need and appreciate as much information as possible. Our research, published in the European transition study, shows that the lower-rated classes have proven to be the most stable to date, although this comes with the clear caveat that they did not exist in any great number until 1997, have only existed through very favourable economic conditions.”
The study was published in the last quarter of 2000, and concentrated on transitions and defaults of long-term ratings, from 1987 until the first half of 2000.
Although the UK remains the principal engine room of the European securitisation market, issuance in continental Europe has significantly climbed in the ABS league tables.
In the first quarter of 2001 the UK accounted for 38% of total European issuance fractionally lower than its 2000 tally of 40%, multi-jurisdiction transactions accounted for 33% of issuance compared with 14% in 2000 while the Italian market came in at 11.3%, more than twice its 2000 5.5% tally (see Figure 1).
Alain Carron, director at the SFR group in Paris, with responsibility for continental Europe, expects issuance outside the UK to continue to grow at a measured pace.
“While Germany and Italy will remain the hotspots of activity outside the UK in the short term, we are now seeing ABS transactions emanating from other jurisdictions with increased regularity,” he said. “There’s already a strong pipeline for the upcoming months and, given the positive market conditions, we expect strong growth in Spain. The Portuguese market could also gather momentum if the legislative framework relative to mortgage securitisation is clarified.”
In line with the market’s continuing growth pattern, there has been a proliferation of asset classes, supported by a strong RMBS market, said Karen Naylor, a director at the SFR group in Europe. “If the mortgage market is strong it lays a solid foundation for other classes to be securitised,” she says. “Housing finance is fundamental to a lot of European economies which means that there are vast stocks of readily securitisable assets.”
Naylor adds that, in the UK, high-street and sub-prime lenders have now become repeat issuers and many are using securitisation as their primary financing tool.
“The UK RMBS market is the most mature at the moment, but other jurisdictions are becoming increasingly more active,” she says. “The German, Italian and Dutch markets have also started heating up.”
Indeed, in the first quarter of 2001, European RMBS issuance climbed 38% higher to close at $7.2bn, up from $5.2bn in the first quarter of 2000 (see Figure 2). The number of transactions completed also jumped from nine to 14 in the same three months.
One asset class that is clearly benefiting from a strong RMBS market is the commercial mortgage-backed securities (CMBS) sector.
Despite a relatively slow start in 2001, with volumes ending the first quarter at $1.7bn compared with $3.71bn in the same period last year, it is still earmarked as one of the principal growth areas in 2001. Three deals closed compared with five in the same time frame in 2000.
Peter Hansell, director at the SFR group in London, describes the decline as temporary, attributed to a combination of delayed closures and launches and expects second quarter volumes to double on the same period last year.
He adds that the range of product offerings has also been significantly extended outside the small number of trophy assets that originally formed the market. “Investor appetite for bonds backed by CMBS portfolios has also grown at a corresponding pace, which bodes well for the market’s continued growth.”
Notwithstanding the European consumer finance market’s relative infancy, ABS growth has still been strong with first-quarter 2001 volumes ending 39.5% higher at $6.7bn versus 2000’s $4.8bn. Deal issuance rose with 10 transactions sealed, two more than the year before.
Perry Inglis, also a director at the SFR group in London, says the increase in completed transactions reflects the steady growth pattern of European consumer finance.
“European consumer finance is growing at a measured pace, most notably in the auto loan and equipment leasing sectors,” he says. “The UK and Italy are taking the lead.”
He adds that many of the pools that S&P is now seeing in Europe are still very new and lack the requisite maturity to securitise.
“However, we are seeing a number of lenders warehousing consumer loans into ABCP conduits, where they mature in terms of performance data history before being brought to the term market via traditional securitisation routes.”
Bonds backed by whole-business securitisation is yet another area of the European ABS market that is set to grow, especially against the recent backdrop of merger and acquisition activity, Apea Koranteng, a managing director at the SFR group in Europe says.
“There is an increased focus on whole-business securitisation throughout Europe, triggered among other things by the recent flurry of M&A activity. In a whole-business, or corporate, securitisation, a special-purpose entity issues bonds backed by the entire cashflow of a company, a process that can allow the entity to achieve a higher rating than the corporation itself under the correct circumstances.”
The European collateralised debt obligations (CDOs) market including collateralised bond/loan obligations (CBOs/CLOs) was the biggest success story of the first quarter of 2001, with volumes ending at a massive $17bn compared with $2.5bn in 2001.
Isabelle Saadjian, associate director at the SFR group in London, explains that the volumes were largely driven by European banks’ and fund managers’ increased use of CDO technology as a balance-sheet management tool and for arbitrage purposes.
Jackie Rodgers is with Standard & Poor’s in London