ABS Bankers Bullish despite a Poor First Quarter
The securitisation market is one of the biggest growth areas of European debt finance. Most intermediaries expect last year's E140bn ($122.8bn) of supply to be beaten by as much as E40bn this year, even though January's volume - three deals with a combined value of less than E1bn - would have augured ill for the rest of the year in most markets.
However, the long lead time on asset-backed securities (ABS) means that first quarters are usually quieter than the rest of the year and, by March, the market was up and running, with E15bn of supply.
John Mullen, global head of asset securitisation at ABN Amro, says: "Deals were either brought forward to the fourth quarter of 2001 or pushed back. Furthermore, there is a trend toward more sophisticated deals for off-balance-sheet treatment, which take longer to arrange."
Michael Raynes, head of the European securitisation group at Deutsche Bank, which topped the euro-denominated ABS league table in the first quarter, says: "New issues have been very well subscribed. The market has seen significant demand for ABS product."
The lack of supply may have had something to do with Enronitis, according to structurers in New York. In the wake of Enron's collapse and the energy company's predilection for hiding debt in special purpose entities (SPEs), the US Financial Accounting Standards Board is considering new legislation for off-balance sheet accounting.
While SPEs in most securitisations are likely to be unaffected, some asset classes, such as conduits, may come under pressure and issuers are reassessing their strategies.
Tamara Adler, a managing director in debt capital markets at JP Morgan, says: "There is the risk of a backlash in the wake of Enron, but there is general agreement that more transparency can only be a good thing."
Nonetheless, the tone, particularly in the secondary market, remains bullish.
Spreads, or yield premiums over reference rates, contracted sharply in the first three months of the year as investors sought yield pick-up in securities that have resisted the volatility prevalent in other markets.
Investors anticipating an economic recovery in Europe also boosted ABS prices, since ABS usually pay interest linked to interbank rates and returns rise with interest rates.
Residential mortgage-backed securities (RMBS) make up the biggest slice of the market (see table) and are least affected by the global decline in creditworthiness. RMBS spreads tightened by around three basis points during the quarter, according to data from BNP Paribas. RMBS represented more than one third off the 42 deals that were launched in the first quarter.
Collateralised debt obligations (CDOs) fared less well than other sectors during the first quarter. Rating agencies continued to downgrade bonds and loans in CDO asset pools and secondary market spreads widened by around five basis points on average.
Ganesh Rajendra, head of securitisation research at Deutsche, says: "The European market continues to mature. Rating activity has increased, but adverse rating actions are mostly limited to CDOs."
Nonetheless, most investment banks are still hiring CDO specialists to cope with strong demand from European investors. Insurance companies have been particularly keen to buy CDOs and related products that help them reach yield targets approaching 7%.
Despite their volatility, CDOs outperformed plain vanilla capital markets. Within the CDO market, synthetic deals, in which risk is transferred using credit derivatives, have overtaken cash deals as the biggest single sector.
Credit default swaps, which provide protection against default in return for a fee, are the most popular tool for risk transfer.
From an issuer's point of view, it is attractive to transfer the credit risk of assets, such as loans, rather than sell the portfolio itself. It is also easier to launch deals that cross geographical borders, since synthetic deals can easily be multi-jurisdictional. …