Two key regulations governing securitizations - Basel II and International Accounting Standard (IAS) 39 - are expected, in their final format, to most likely redefine structured finance in terms of its role, deal structures, investor base and not least of all, volume, analysts say.
"They will emphasize the need for the development of specialized and sophisticated investors for subordinated tranches and equity pieces," said Alexander Batcharov at Merrill Lynch. "The Bank of International Settlements (BIS) will potentially alter banks' motivations as both issuers and investors for cash and synthetic securitization. As the above proposals take final form, market participants should take note and start positioning themselves for the future altered regulatory environment - hence, the effects on the structured finance market will gradually become palpable."
Just how strongly will the effects of Basel II be felt in the market next year? Bankers' opinions vary; some say Basel is already impacting pricing in the market and this will increase with time.
"Basel will have a more significant impact on pricing next year," asserts Iain Barbour, global head of structured finance research at Commerzbank Securities. According to Barbour, funds have already been set up that will pick up the benefit of ABS when the deals mature.
Will spreads be affected?
However, Birgit Specht, director and head of ABS research at Dresdner Kleinwort Wasserstein, says that there really hasn't been an effect on spreads of AAA notes from Basel, as investors have been rather occupied with negative market news and buying for stability. The postponement to 2005 means that it should not have a major effect on spreads until the timing becomes clearer. It has, however, had a positive effect on spreads of unfunded portions where the credit risk was placed through credit default swaps (CDS).
In terms of Basel, Lee Rochford at Credit Suisse First Boston points to the negative risk-weightings applied to the subordinate pieces as a possible problem. "Increasingly the deals that we do are driven by the ability to place the double-B pieces. If we can continue to place these tranches with the insurance sector, and it in turn continues to be unaffected by Basel, then there will be no issues to overcome. However, it is an area which we will need to continue to monitor."
The Federal Deposit Insurance Corporation (FDIC) recently approved a final rule that modifies the regulatory capital requirements for bank holders of securitized products. The proposals are similar to the Basel II proposals.
"There is a concern that this will create an uneven playing field," said Bob Patterson of Morgan Stanley. "It is more of an issue for the less capitalized lenders, where in the case of the retained positions in the securitization, they may be required to hold more capital against their securitizations and this might cause a disincentive for securitization.
"The guidelines will phase this over time and therefore I don't expect the impact to be immediate," Patterson added.
Another significant issue that has taken second place to Basel - but in some ways can have more important implications - is the implementation of IAS 39 and SIC 12. Steve Gandy at Bank of America describes this as a "big wrench in the wheel of progress" for European issuers wanting to remove securitized assets from the balance sheet.
And what about recession? In terms of the year ahead, it is not clear what the effect of a recession on the ABS market would be. As Patterson at Morgan Stanley comments: "It is certainly true that the looming recession is giving more cause for concern. However, for the most part there is confidence that deals have been rated to withstand economic recession."
CSFB's Rochford believes that the effects of a possible recession are not yet being factored in by the European investor base, he adds: "Although we have seen that investors have been mindful of deals with U.S. collateral, we haven't yet seen this being applied to European collateral. If and when there is a European recession then we may see the investor base respond."
