Byline: Francesca Murra
It has been another great year so far in the asset-backed securities (ABS) market with bankers celebrating record volumes - particularly in residential mortgage-backed securities (RMBS).According to research from Merrill Lynch, European funded Onon-synthetic securitisation issuance reached $136bn (E116bn) by the end of September, 60% above last year, while RMBS volume stood at $77.1bn, more than double the volumes in 2002.
Although funded issuance is up, Ounfunded synthetic securitisation issues are 30% down on last year, at $34bn, according to Merrill Lynch. However, this figure did not include privately executed synthetic collateralised debt obligations (CDOs) and single tranche CDOs, whose volume is estimated to be close to $80bn so far in 2003.
Jenna Collins of Merrill Lynch's international structured credit research team says while auto-loan backed and corporate securitisations in Europe continue to be in strong demand because of the historically short supply of these assets, the most important trend in the third quarter was the continuing heavy issuance of RMBS.
Chris Ames, head of the structured credit research group at BNP Paribas, says the recent large issuance in UK RMBS master trusts has been very much investor-driven, and that this demand is still growing both on the Continent and in the US.
Ames says: "Given that we have seen already twice the supply of last year, RMBS spreads have held up extremely well, and are actually a bit tighter than last year. This has been achieved by the inclusion of new European investors, many of whom have begun to buy ABS as a result of the corporate credit trauma of the past couple of years, and also by tapping the deep and broad US investor base."
The growing investor base is something that bankers have pointed to as a positive development this year. This new investor participation includes "real money" investors - mainstream fund managers and insurance companies. These are a welcome addition to the traditional ABS investors, as they areO expected to help create a deeper and more liquid ABS market in Europe.
Muri Rhee, managing director in syndicate and trading at Deutsche Bank, says another addition to this group has been the influx of CDO funds, which are buyers of subordinated tranches and therefore an encouraging sign for the placement of lower-rated tranches in ABS deals.
Within the burgeoning RMBS sector there has also been innovation, with the development of a structured covered bond issue in the UK - a type of mortgage-backed product similar to German Pfandbriefe (see page 38). HBOS executed the first transaction, a [euro]3bn ($3.5bn) issue in July, lead-managed by Citigroup, Dresdner Kleinwort Wasserstein, and Goldman Sachs. Another transaction from HBOS is being marketed and Bradford & Bingley, the UK building society, has announced that it is looking to do a covered bond deal next year.
One question being asked in the market is whether the covered bond structure will cannibalise existing RMBS, or act as an additional funding tool. Nonetheless, Colin Evans, managing director in the European debt capital markets and structured finance group at JP Morgan, says the covered bond structure may well spread elsewhere in Europe. He says: "We are seeing that there is increased interest from other jurisdictions to use the product. …