Asset-Backed Securities Market Feels the Pinch
Byline: Piers Townsend
Securitisation market practitioners can be an intimidating bunch, but they like to party. Perhaps the complexity of the market and the long lead time on new issues makes them play harder when they get the chance. This usually makes the annual asset-backed securities (ABS) conference in June a memorable affair, not least because it is normally held in Barcelona at a beachfront location. This year, however, the conference has been moved into the more business-like confines of the city, which is apt at a time when the global slowdown has impacted on the amount of fun and fee income available to securitisation specialists.
The ABS primary market has been rather disappointing this year compared with the past few years. While investors clamour for new supply, a lot of potential issuers are more focused on protecting their balance sheets than securing off-balance-sheet funding, especially now that accounting standards are under the spotlight on both side of the Atlantic.
John Mullen, global head of asset securitisation at ABN Amro, says: 'The market is recovering from Enronitis and people are thinking about their balance sheets and issues of consolidation or de-consolidation. While off-balance-sheet funding is too important to be killed off, there is an on-going process with the Financial Accounting Standard Board in the US that will take time to sort itself out.'
Despite the lull, volume in the European market is still expected to increase versus 2001, when between [euro]120bn ($110m) and [euro]140bn of supply hit the market, depending on which asset classes and structures are counted. Intermediaries expect a 25% increase, which could mean issuance of up to [euro]180bn.
The relative dearth of supply - and increased concern about corporate credit quality among issuers and investors alike - has had a dramatic effect on the secondary market for ABS.
The lowest risk products, including residential mortgage-backed securities (RMBS) and 'consumer ABS' deals backed by credit card and lease payments, have performed very well indeed. Secondary spreads, or yield premiums over reference rates, have tightened across the board. The performance has been so good in the biggest RMBS markets - the UK and Netherlands - that investors have turned their attention to other markets.
Italy has been one of the biggest beneficiaries, according to Lee Rochford, co-head of securitisation at Credit Suisse First Boston (CSFB). 'We have seen a narrowing of spread differentials between Italy and the other markets,' he says.
The bigger markets, such as the UK, France and the Netherlands, continue to provide a lot of supply and the peripheral markets in Southern Europe have become more active.
But Germany continues to be the 'next big thing'. Rochford says: 'Germany will remain a largely synthetic ABS market until the corporate bond market opens up; but with accounting standards currently a big issue, that market is likely to be closed for a while.'
One thing the ABS market has in its favour is resilience to the global credit crunch. One recent ABS success story is Fiat, the Italian carmaker that has sponsored three auto ABS deals since 1999.
Fiat's equity and corporate bond prices have been under tremendous pressure (see table), to such an extent that the company has decided to float Ferrari, its jewel in the crown, to raise cash. Fiat's ABS issues have underperformed those of other carmakers, but corporate level turmoil has had relatively little impact on the company's auto ABS paper, according to Ganesh Rajendra, head of European securitisation research at Deutsche Bank. 'The deals are generic in nature, relying on the 'true sale' of assets allowed for under explicit civil laws. Any set-off or commingling risk is mitigated by the structure,' he says. …