Securitisation may be one of the newer forms of debt financing in the capital markets across the world but it is certainly one of the fastest growing across the world. The most mature and developed of the markets, in the US is only a couple of decades old but it has grown to become one of the largest sources of debt financing in the US today, and securitisation is growing across Europe and Asia.
Europe’s asset-backed market is younger and considerably smaller than its US cousin, but it has seen very rapid growth. According to figures from Dresdner Kleinwort Wasserstein’s European Debt Research team, there was a record E180bn of European ABS (Asset Backed Securities) issuance in 2003, up a remarkable 37% year-on-year. was launched just over three years ago as an independent website specialising in the provision of transaction data for the European Securitisation industry. Dave Colling, product director, agrees that watching this mushrooming growth has been very pleasing. “There has been good news almost across the board for the ABS market. Not only has supply been strong but demand too. In the fourth quarter of 2003, demand actually outstripped supply even with the high issuance.”
This strong demand for securitised paper has seen credit spreads narrow markedly over the past year in particular, says Colling. “If we look at AAA Bullet five year Sterling RMBS (Residential Mortgage-Backed Security) issues, which were trading at 23 basis points over at the end of 2002, by the end of January 2004 that spread had narrowed to 15 basis points.”
According to market participants in the industry, surveyed by the European Securitisation Forum last November, liquidity should further improve as investor knowledge grows. Indeed they note that the traditional investor preference for ‘buy and hold’ strategies is slowly giving way to more active investor trading strategies.
Another important development, highlighted by Colling is the growing presence of US investment banks and non-banks already involved in the industry but now with European-based operations as well. “This has to be a good signal to investors and issuers alike that the European market is set to further improve in depth and liquidity. And Lehman Brothers, the US investment bank, has just launched a brand new European ABS Index – the first of its kind in Europe – which we believe is a positive move and will have been very well received by investors, eager to see some sort of market benchmark.”
As well as benefiting from a reasonably benign macro-economic environment, the European securitisation industry is keen to see further good news from the regulators. One important regulatory issue in the pipeline is the EU Prospectus Directive in which the EU is striving to make mandatory the declaration of a timetable of reporting from the issuer, something which would greatly improve and clarify information flow and so aid investor confidence.
One issue weighing particularly heavily on the supply side is the creation of the new Basel Capital Accord and its effect on the securitisation market. When the original Basel accord was agreed, the capital treatment appropriate to securitisation transactions was not specified, and now the aim is to develop a more sophisticated framework for evaluating a variety of credit risks including those involved in securitisations.
Colling points out that currently there are significant benefits for banks to originate securitised debt, which involve the satisfying of their capital adequacy rules. There is a worry that the new Basel Accord, or Basel 2, could take away these advantages and make securitisation significantly less attractive.