BARCELONA - As is always the case at the Information Management Network's ABS summit held here, this year's attendance for the second day's opening session was sparse, which means that either the attendees didn't bother with the hangover kits handed out at several booths the day prior, or the cure didn't work. But the small audience did little to stop panelists - who were in full attendance- from having an interesting discussion on some of the more innovative aspects of European securitization.
The allure of European emerging market and new asset transactions have taken somewhat of a backseat to the more established Western European market, which is flooded with repeat, benchmark issuers. But despite this, panelists at the second opening session called, New Frontiers and Developments in European Securitization, said that there are still lots of innovations to be found. Alain Carron, managing director at Standard & Poor's and moderator at this panel, said that over the past year, he's seen a dramatic shift in the type of inquiries from these jurisdictions.
A few years ago, emerging market transactions were largely driven by future flow structures from Turkey. However, this has grown to include new deals backed by different asset classes and transactions from Central and Eastern European issuers as well as other Middle Eastern countries, although volume from this region has not grown to the same extent.
A speaker on the panel representing Hypo-und Vereinsbank AG (HVB) said that over the past year, HVB has had the mandate for several of these deals. "Because we have a local presence here, we are one of the only investment banks offering local products to the market," said the HVB speaker. The focus for the bank has thus far been the larger local tier one banks. Corporate participation is still behind as the regulatory aspect for this is still under development, the panelist said.
But despite being optimistic on the growth prospects in these emerging markets over the next two years, the HVB representative said that the volumes might not be as big as some anticipate. "Only certain originators are looking for funding," he said. "Foreign banks can get funding elsewhere and the corporate world just isn't there yet."
What's behind the sudden surge in emerging market deals? Panelists cited the significant amount of market liquidity and the low interest rate environment as the factors driving the increasing appetite for these products. The mounting securitization activity has also coincided with the growth of other investments in these new markets, they added.
Ganesh Rajendra, managing director and head of securitization research at Deutsche Bank, said that growth in Central and Eastern Europe has been supported by authorities such as the European Bank for Reconstruction and Development (EBRD) that have actively encouraged these regions to develop laws facilitating the use of securitizations. It's the kind of muscle and momentum that was absent in the development of the Western Europe securitization market, Rajendra said.
Other areas of note
Whole loan trading looks set to take off in Europe. GMAC-RFC, which pioneered this concept in the U.K., has over the last 10 years been busy setting up shop in several European jurisdictions. "In continental Europe, we are looking at expanding future fund strategy through the use of whole loans," said panelist Jennifer Anderson, a managing director at GMAC-RFC.
Anderson said that the market still has challenges to overcome but with the entrance of new players, the market should pick up speed in the near-term. For GMAC-RFC - which has set up shop in some of the more established mortgage markets that include the Netherlands, Germany and Spain - the more likely place to start would be in the Netherlands, since it has the most historical data available, said Anderson.
The panelist from HVB said that the European subprime mortgage sector is also another area with great growth potential, although there might be differences between jurisdictions. For instance, German mortgage market growth has been stifled by very tight spreads on residential mortgages, so the structures would likely vary from those seen in the U.K.
The insurance securitization sector is also expected to see more action. After years of false starts, panelists said that the industry dynamic has shifted in favor of securitization. "This year alone, after Katrina, people began to understand the value of locking in capacity over the long term," one of the panelists said. "Investors are starting to understand this asset class, and are staffing underwriters within their groups with this aim."
In some cases, the capital markets have absorbed deals that the insurance market would not have traditionally done. Deutsche's Rajendra said that, from an investor's perspective, there is a huge amount of money chasing new assets that is driving demand for these products.
First loss securitization also earned a place among the innovative. Large securitization issuers are likely to have a significant amount of money tied up in these structures, and securitizing the first loss position provides an excellent capital management tool for these players. "There has been a lot more interest in these deals and it should prove to be popular," a panelist said. "From the investor side, there has been a lot more interest, demand coming from the side of hedge funds."
Is it finally time for Pan-European RMBS?
The potential for multi jurisdictional European RMBS has been talked about for a long time. As the markets mature and issuers become more established, it seems a likely step for Europe. However, jurisdictional differences have proved too great to get any of the many issuers to agree on a single formula that works.
GMAC-RFC said that its multi- jurisdictional presence has created an opportunity for this type of issuance. "Our business model sets us up for issuing these deals going forward," GMAC-RFC's Anderson said. "Throughout the various jurisdictions we are in, we use a common risk management and modeling approach that should set us up to issue a very concise story across these countries."
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