The market looks ready to go for another year-end dash that may send volumes soaring compared with 2001 totals. Market sources estimate that at least US$45 billion (equivalent) of issuance should come to market by December, noting that there may be more transactions lurking on the sidelines that could potentially push that number even higher.
Despite the difficult months that have passed, which still leave unresolved regulatory issues like accounting regulations and Eurostat's decision to redefine what government assets are eligible for off-balance-sheet financing, European securitizations continue to be an important source of financing.
According to Merrill Lynch, the structured credit market in Europe is growing - regardless of events in other sectors of the European fixed income market. "Given the underlying assets, the ability to select a risk profile along the capital structure of a bond, unique credit exposures, the ability to tailor bond and risk structures to investor's specific demand, as well as the defensive characteristics of the asset class - structured credits are increasingly becoming a necessity in every fixed-income portfolio," reported analysts at the bank.
At Morgan Stanley, reports show that fourth-quarter issuance in 2001 represented 49% of issuance for the entire year; in 2000 and 1999, it represented 44% and 47%, respectively. If year-end totals come in at the lower end - for instance, 44% of this year's issuance - the year would end with a record $149 billion of new issuance in 2002, which is in line with market projections made earlier this year.
The RMBS pipeline promise to finish strong, and year-end issuance now stands at E18.5 billion with 14 deals expected. It puts overall supply in the last quarter of this year above figures recorded in 2001. The awaited Holmes 6 promises to be a major contributor to this number and is expected to issue the largest RMBS and ABS deal so far this year. Abbey National's deal is expected to total E6.3 billion and will include a mix of dollar-based tranches, Euro-based tranches, Sterling-denominated tranches and one Swiss Franc-based tranche. The deal will be structured in five series which will be predominately dollar based.
It's the sixth transaction to be issued from Abbey's master trust structure, and total issuance now equals E15 billion, said market sources. According to Dresdner Kleinwort Wasserstein, Abbey has modified its underwriting criteria since the last issue, allowing for the inclusion of self-certified loans (with an LTV greater than 75%) as well as Scottish mortgages. Flexible mortgages are currently not part of the portfolio make up but may be added to the pool at the close of the transaction.
On the Dutch side there are two deals emerging that will break from the traditional Dutch RMBS structures. Match I from ABN AMRO and Deutsche Bank is currently roadshowing and is expected to price early this week. The E550 million transaction carries four tranches: a triple-B piece, a single-A rated tranche and a split triple-A rated piece. The deal offers three fixed-rate tranches; the portfolio consists entirely of interest-only mortgages.
"Other transactions have a set-off risk, where borrowers may seek to exercise set-off of certain amounts owed to them against amounts due from them in relation to the mortgage loan," said one analyst. The Dutch mortgage market allows borrowers to invest in a product provided by an insurance company instead of repaying the principal directly to the lending bank, which in the end provides the borrower with a tax-free return on the investment that can be used to pay the mortgage.
The set-off risk exists only if the insurer were to become insolvent. "The entity providing the mortgages checks whether the borrower is paying up; with the mortgages in the match pool there is no one there to check, so in a sense it could be considered riskier," said the analyst. Nonetheless, typical Dutch RMBS structures prove more expensive, and originators are likely to find that passing the risk directly on to the investor more interesting, so expect to see more deals structured this way, added the analyst.
Already brewing in the pipeline is a follow-up deal to GMAC's first Netherlands venture, E-MAC 2002-1, issued in July. Its debut transaction was the first to have its rating delinked from the insurance company because of the diversity of insurers included in the transaction. The largest exposure to any one company was limited to 10%, making set-off risk minimal.
Egg and more Italy
On the credit card end, Deutsche is in the market with a credit card deal for Egg Banking plc. Egg is a subsidiary of Prudential PLC and is primarily focused on providing Internet-based banking services such as deposit accounts, credit cards, personal loans and mortgages. The deal will be issued in two triple-A tranches - a E345 million and a GBP217 million piece - one GBP25 million single-A piece and one GBP40 million triple-B piece. Price talk on the triple-A pieces hovers in the low 20 basis points over the three-month Euribor range for the Euro piece, and in the low 20 basis points over the three-month Libor area for the sterling piece.
The Italian market is set to take a front seat in the fourth quarter, driving volumes up with at least four deals slated to come to market before year's end. Noted among market sources is a E3 billion RMBS for Intesa BCI that would be the largest RMBS deal from Italy. And despite the Eurostat pending modification of its ruling that requires that certain asset classes go back on Government balance sheets, the Italian treasury is forging ahead with its E7 billion real estate securitization, much like the tempo it set this time last year when it issued a similar transaction.
Telecom Italia priced IMSER 60 last week close to market expectations, said sources. The deal launched with a modified structure that included a wrap on the subordinated tranche as well as a wrap on the triple-A rated tranches.
New on the telecom front is a E2 billion telecom receivables deal for Irish telecom Eircom that is expected to debut this year. Deutsche Telekom is also in the market with its telephone transaction, structuring a securitization for the sale of its six cable assets. France Telecom is also said to be paving its way into the securitization market. According to market sources, the French government said last week that it has the ability to set up an SPV as part of the recapitalisation program of the French telecom.