With prepayments stabilizing, the Belgian securitization markets may be poised for a comeback.

According to Moody's Investors Service, Belgian securitizations have been on a decline since reaching record volumes in 1998, when the market hosted EURO1.6 billion in new issues. For 2001, numbers reflected a new low of EURO380 million. However, based on the improving market conditions and the maturing of merged bank entities, the market will potentially see some growth.

A major culprit explaining the swoon in volume levels is the 45% decrease in new mortgage production to EURO8.7 billion from EURO16.4 billion, which is linked to an interest rate increase of 1.5% in 2000 that consequently caused lower rates for refinancing. "We already had signs by the last two months of last year that the trend was reversing; it reached bottom at around 2.5 Libor and now it's around 3.5 Libor," said one analyst. "The question is, will this continue or flatten? In our opinion we expect it to remain stable for some time [and] it's likely they will retain interest rates at low levels before these figures go dramatically up. We can expect an increase in margins after a 12-month period."

As for prepayment levels, the market can be rest assured that figures are stabilizing from the record high levels of 1999, when many borrowers locked in low rates on mortgage loans. However, all the refinancing that would have taken place was done so at that stage, said analysts, and with interest rates presently remaining at good levels, it's likely that prepayment figures will remain low.

Bigger Belgium banks

The recent M&A activity that has consumed Belgian-based banks have also stumped securitization activity. Because of the lengthy transaction wait, securitizations, along with other projects, were apt to take a back seat until the integration process was completed. As the deals finalize, market analysts expect the focus to shift back to securitization as an alternative-funding tool. "Banks don't have a smarter alternative," explained the analyst. "Instead of paying 8% to maintain balance-sheet assets this fee can suddenly be released through the securitization market. While some banks may still be able to get bank loans this would not likely result in reaching capital ratios and the rate on those loans might not be as good as triple-A rated ABS."

Listed among those with the most potential are Dexia Artesia, BBN, KBC Bank and Fortis, particularly because originators who have not securitized mortgage or consumer loans since 1999 may be reaching critical mass in 2002, said Moody's. Repeat issues are generally expected for RMBS, consumer/auto loan deals and synthetic CDOs. Artesia, now merged with Dexia, for example, established an MBS and auto-loan program in 1998 and is expected to continue with its efforts once the merger is finalized. Along with repeat MBS and auto loan issues, CDOs may also pick up in the coming months, said analysts.

Nonetheless, the success of securitization still rides on the evolving economic scenario, which presently only offers debate over what the market may expect in 2002. "Presently we have a discussion on the priority of securitization in regards to our present portfolio and present market conditions," said Olivier De Ryckere, head of securitization at KBC Bank. "The main incentive in prior years was to achieve regulatory capital requirements but today other factors will also determine whether and how to securitize (such as funding cost, credit risk transfer, etc.)."

KBC was in the market in 2001 with a synthetic CDO (CYGNUS 2) and an RMBS (Phoenix Funding). As the merger of the retail activities evolves, De Ryckere expects further securitization of KBC mortgage-backed loans (RMBS) and commercial-mortgage loans (CMBS). Eventually another synthetic CLO (Cygnus-type) may be launched securitizing corporate loans. QUASAR, the KBC-sponsored multi-seller partially supported asset backed commercial paper conduit (EURO 4 billion) rated A1/P1, will also launch this year. In a first phase it will issue euro-denominated commercial paper and U.S. commercial paper later this year.

It is unlikely that the market will see auto-loan securitizations any time soon, as the loans are not all in place. "There is no urgent need to bring [auto loans] to market," said another source. "On our side there is no critical mass and if there is in some cases, the fact is that it is too operationally difficult because we are waiting for all the portfolios to be together before we consider the ABS market."

What might further pose a threat is how the Basel regulation on ABS is finally implemented later this year, an issue that will potentially affect the entire European ABS market. For Belgian banks, the draft of the accord seems to be dictating final word as market participants complain that the Commissaire Bancaire, its regulating bank, is jumping the gun and intends to apply the sections most burdening to banks in present transactions. "Finally, KBC together with the other Belgian banks will need to have intense discussions with its regulator (the Commission Bancaire & Financiere) to assess the implications of the new Basel rules with respect to securitization," De Ryckere said. "We are keen that a level playing field is maintained at all times with other jurisdictions and that a right balance is found in the eventual applying (ahead of implementation) of the new rules. In this respect it notes that the U.S. regulators already apply (as of January 1, 2002) a risk-weighted treatment for ABS."

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