The phenomenal year-over-year growth of the European ABS market is set to continue in 2006. But as the market grows so has the number of players and new entrants have unleashed speculation among European investors about the make-up, motivations and expectations of the changing ABS community. Barclays Capital set out to pick at the psyche of the market via its first European ABS investor survey and published its results last week.
The impetus behind the survey was the generational schism between more seasoned buy-and-hold buyers and a new breed. "Most investors were intrigued that Barclays actually cared what they thought," said Hans Vrensen, CFA and member of Barclays research team as well as author of the survey. "A lot of investors have been asking what the other players have been doing - the older, more entrenched investors want to know what the new investors' objectives are."
The broadening of the investor base has coincided with the phenomenal growth in European ABS volumes and that volume is set to grow even bigger on the back of new participants gaining a foothold in European issuance. According to the survey results, the average expectation of growth over the next 12 months is approximately 40% but the weighted average growth is at 21%. "Some of the smaller and newer players expect to double their business but for the larger more established buyers it is a bit more difficult to achieve that type of growth," said Vrensen.
The newcomers to the market will largely include investors from outside of the region, such as the U.S., Australia and Japan. A number of additional U.K. and other European investors might also enter the market. "We have seen an increase in different types of fund managers - including hedge funds [and] money managers as well as structured vehicles, including SIVs and CDOs," said Vrensen. "These types of investors are likely to bring about a change in market perspective."
One of the surprising finds of the survey was the large requirement for reinvestments. Vrensen said that when weighted against the current size of their portfolio, the average requirement was around 9%, with some investors having much greater requirements. "That means that a significant portion of new issuance will be taken up with reinvestment requirements," he said.
Oddly enough, while most of the respondents - Vrensen said that 50 respondents with a combined portfolio of 170 billion ($204.4 billion), which represents 28% of the entire European ABS portfolio participated in the survey - described themselves as buy and hold investors, the same respondents said that liquidity in the secondary market was quite important to them. "One of the most frequently discussed topics in European ABS is the limited amount of secondary trading," said Vrensen in the survey report. "Typically the reason given is the European ABS investors are mostly buy-and-hold participants. [Some] 84% of respondents confirmed that this is accurate."
Overall, only 12% of the respondents' ABS assets - which represents approximately 20 billion ($24.06 billion) of their total combined portfolio - were acquired on the secondary market. "Since our survey respondents account for 28% of the overall universe, we assume that they also represent 28% of secondary trading," said Vrensen. "We estimate total European ABS assets acquired via secondary at approximately 73 billion."
The discrepancy between secondary trading volumes and the perceived importance of secondary liquidity might be an indication of the future potential of this market. Vrensen said that most of the respondents mentioned that it was nice to know that the market was available. Among the respondents, some mentioned frustration at the lack of freely available performance data in certain sectors like CMBS, which made it difficult to get bids from any other dealer than the one that originally brought the deal to the market. "It is an interesting topic and its not just a CMBS issue - it's across the board," said Vrensen. Last week's creation of a transparency taskforce headed by The Bond Market Association along with four other EU trade groups is just one of the strides being taken towards creating a better trading environment in the European secondary markets.
"I think that in 2006 the market will see improved transparency and a further broadening of the investor base, [which] may mean that more parties will want to trade," said Vrensen. "Cash flow modelling has also made progress - and investors can get these model and model their deals much easier than before, further facilitating secondary trading."
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