BARCELONA - This year's Global Asset Securitization Conference in Barcelona began with a bang, although the tone was dampened somewhat by the midweek news of air controller strikes, threatening to keep some attendees beached in Barcelona for longer than initially planned.
Like most conferences these days, cell phones were buzzing in between sessions, though not all calls were for sealing deals or follow ups. In fact, it seemed the only thing players were pricing was their panic tickets home, negotiating earlier flights and other travel-related concerns. The possibility of being stranded in airports somewhat overshadowed any success of the discussions over the past three days, and by lunchtime on day three the halls were nearly empty.
Regardless, the tone at this year's Spanish shindig was as positive as it could be, considering the circumstances.
The fact is - or so the theme of conference would suggest - that European securitizations are almost all grown up. Panelists throughout the day spoke of a maturing and growing investor base that demonstrates the overall sophistication of the market.
"The market has been tested, it has shown achievement, and it shows maturity; now the European market is ready to evolve to the next stage," commented one panelist in the morning general session. "The impact of risk in the corporate world hasn't triggered any banks to go down as a result of the credit blow-up."
What has developed is an aggressive "open-eyed" environment, specifically from the perspective of investors aggressively seeking greater transparency within the market. "Now we see clear, precise information," said one panelist. "But it's important to remember that an issuer can't please everyone at all times. We do get questions that we have not been able to answer. We would like to tell investors all they want to know, but there are competitive considerations which still make it difficult to answer some questions."
These tend to be the more ad hoc requests, which often entail making future predictions. "With whatever is said you have to wonder if you have given the investor bad advice," the panelist continued. "That's just one of the problems with disclosing forward looking information."
Because of the downgrades this year, reporting has become more significant than ever. Fitch estimates that of the transactions it has taken action against - including pools with European-based assets - two-thirds have been CDOs, with the remainder comprised of whole business deals and general ABS. And this fundamental demand for transparency in the marketplace must be addressed, particularly when it comes to secondary trading.
"More defaults and more downgrades will [cause] illiquidity in highly structured assets," said one panelist. "It may be that your transaction is in no danger of defaulting, but because of the complicated structure there is no appetite on the secondary level. We need much more transparency for the safety of ABS, and the real problem is getting true information through."
For new issuers looking to enter the market, panelists said that there would be greater need for them to understand what tools they will employ for reporting.
Other issues on the frontline
As for regulatory developments, it is anticipated that Basle II will be relatively disappointing for the industry, mainly because of the harsh capital rules for lower-rated ABS. What could be most damaging is the proposed capital deduction for the riskier tranches, which will dissuade banks from buying these notes and will potentially create a problem in shifting credit risks.
On a national level, it's the hope that regulators don't jump the gun and impose such penalties before the final changes to Basle II are announced. Panelists pointed to the recent changes made to the French securitization risk weightings and said that these were potentially more severe than those suggested on a European level, pointing out that such changes were implemented without consenting the French banking industry.
Still, securitization continues to be recognized as a necessary financial instrument, and there has been noticeable interest from smaller institutions such as banks, mutual institutions, and financial institutions that traditionally sought funding in other markets. As managing balance sheet risk becomes a greater priority, securitization may be the best option for many entities that were previously unfamiliar with the industry.
"The challenge will be to put together structures that satisfy both the market and the regulators," said another panelist at the conference. "There is the risk of being too innovative where it may be best to stick to the tried and trusted."
Yet the introduction of smaller players does not denote the disappearance of the larger players. The next step in the evolution of the market could involve joint efforts by these large banking entities, potentially bringing to market more pan-European transactions.
Going forward, expect to see a more sophisticated market with a better understanding of risk.
Panelists warned that market players should veer away from what was called a dangerous, broad-brush approach. "Look at the utility deals and the pub deals - these are both considered whole business deals, but they are completely different animals," said one panelist.
The privatization phenomenon should continue to incite deal flow in the U.K., as well as potential securitizations associated with the telecoms, which, at some point, will be want to leverage their businesses as their customer bases grow.
