In a mad rush to make fourth-quarter volumes memorable, the European asset-backed securities market has exploded with new issues.

Ireland's Celtic Irish Mortgagee Securitisation No. 7 Plc, in the pipeline earlier this month, priced its 650 million RMBS last week.

The triple-A tranche met price talk at 26 basis points and the single-A-rated notes and the Class B, single- A-rated notes came in at 65 basis points, a welcome change for the rating which priced tighter than the comparable single-A rated piece of Dutch-based issuer, STReAM.

"These levels show a return to pre-September 11 prime RMBS launch spreads," said analysts at Dresdner Kleinwort Wasserstein.

Counted among those deals that priced last week was residential Mortgage Securities (RMS) 11 Plc. The U.K. subprime issue, issued by Kensington Group, is delivered to the market in a package that includes two U.S.-dollar triple-A-rated tranches totalling $488 million and two subordinated sterling-denominated tranches of GBP32 million issued above an unrated class M piece.

The triple-A tranches priced three basis points wider than the previous RMS 10 issue, and came in at 34 basis points and the sterling-denominated single-A-rated tranche priced at 115 basis points.

Anthea Srl, the Italian-based CDO transaction launched by Banca Popolare di Spoleto SpA, also priced its 269 million transaction in last week's market.

The deal, jointly managed by Credit Suisse First Boston and Banca Poplare Monte de Paschi, priced its 186 million triple-A notes at 60 basis points, a second tranche of triple-A notes totalling 40 million priced at 70 basis points.

"The triple-A notes came in at the widest spreads we have seen for AAA tranches of CDOs this year, indicatingannot be found, the deal may be exposed to term extended beyond maturity, reports Dresdner.

Cruise Ship II, which closed in March 2001, securitizes future receivables related to the construction and delivery of one cruise vessel. The notes are backed by units issued by the French Fonds Commun de Creance, a vehicle established under French securitization law, which are in turn backed by a receivable payable by RCCL upon the delivery of a cruise vessel provided by Chantiers de L'Atlantique, the originator.

Judging by the continuing deterioration of the tourism industry, there is also concern that the credit quality of RCCL might continue to disintegrate. Shortly after the September 11 attacks RCCL share prices fell over 50%. An analyst at Dresdner explained: "Noteholders could be exposed to the credit quality of RCCL for as long as 12 months should the company take full advantage of its grace period [and] S&P states that going forward any further changes in RCCL's credit quality may still affect the rating of Cruise Ship Finance II."

Cruise ship mitigants

keep deal afloat

While Moody's has assigned a downgrade, the fact that the rating's group chose to downgrade the deal by one notch rather than two notches highlights that the transaction contains mitigating factors that shield it from an RCCL default.

"The risk is relative to RCCL - but it is not a pure RCCL risk," said Paul Mazataud, vice president and senior credit officer at Moody's. "There are actually two mitigants - ALSTOM is providing a performance guarantee and a guarantee on the sale price. If for some reason RCCL does not pay for the vessel then it could be sold on the secondary market. If the sale price were below $290 million, ALSTOM would provide the difference between $290 million and the sale price with a maximum of $85 million. With the two-notch downgrade of RCCL, it could have led some to assume that a two-notch downgrade was in order but the impact of the guarantees made us decide that one notch was in order."

Hypothetically, if the best price the transaction can get in the secondary market is limited to only 10% of what was due by RCCL ($290 million), the Guarantor is committed to pay an extra 29% (or $85 million). From an SPV point of view it would still be considered as a 61% loss. Mazataud explains: "Under the terms of the deal the SPV can claim the remaining amount from RCCL and it could expect to receive some cash, thanks to this unsecured claim."

To be sure, Moody's assessment of the third vessel considered the possible scenarios that could occur during the remaining term of the transaction. The three determining factors included the rating of RCCL; the credit quality of the guarantee provider, ALSTOM, and the vessel's state of completion, which is due to be delivered early next spring.

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