The Netherlands may not be quite at the forefront of European securitization, particularly for deals backed by non-mortgage assets, but many securitization pros believe that the Dutch market is ripe for expansion, with both volume and number of deals set to continue the upward trend shown last year.
In 1999 there were nine public deals totaling E5.7 billion ($5.3 billion), a figure that compares favorably with the five completed in 1998 for E1.7 billion. However, in 1999's total there were only two non-mortgage deals, demonstrating just how much the market is dominated by MBS transactions.
The non-mortgage market included ABN Amro's E1.224 billion Amstel consumer loan deal, which remains significant because it is still the largest non-mortgage transaction (though it may soon be beaten, perhaps by further deals from ABN). The transaction was split into four tranches, which included A class notes, rated Aa2 by Moody's Investors Service and AA by Standard & Poor's and Fitch IBCA.
Lack of Diversity, but Euro Should Help
Market pros agreed that the lack of diversity is simply a reflection of the relative immaturity of the market and the Dutch financial culture. "I don't see any particular reason for the lack of ABS, except that generally the banks are in pretty good shape so they may not need the finance so much," said Alexander Batchvarov, head of international asset-backed research at Merrill Lynch. "On the other hand, in future, the banks may need to improve their return on equity and find alternative funding. They may look for securitization for that purpose."
Batchvarov pointed out that the situation is similar elsewhere in Europe. "If you look around Europe, you don't see many other transactions different from mortgages. It's the same in Belgium and Spain. It's not the market itself, it is more related to the needs of the issuers."
In the preponderance of MBS deals, with non-mortgage deals slowly taking off, the Netherlands is following the pattern established in virtually every other European country, from the original stirrings in the U.K. to the newly diversified German market. "As the market matures, I expect to see a broadening of asset classes in the Netherlands and a diversification away from purely MBS deals," said Lindsay Douglas, a senior analyst with Moody's. Douglas expects the Dutch market to follow the same path as Germany, and predicts growth in CLO transactions, in particular.
In the immediate future, the consensus is that the market will see solid growth. "Our sense is that this year you will see sizeable issuance out of the Dutch market amounting to several billion dollars," predicted Tariq Rafique, head of ABS at ABN Amro. "We are currently working on five or six transactions amounting to E2.5 billion to E3 billion for third party clients."
Mark Lewis, head of European ABS at ABN Amro, bases this confidence on the expanding Dutch mortgage market. "If you look at house prices in the Netherlands, they have increased quite sharply over the last few years - by 14% from mid-1998 to mid-1999 - so correspondingly, the size of the mortgage market will increase too," he said. "With increased mortgage demand, institutions will have an eye on solvency and balance sheet limits, and that is what is driving the growth in the Dutch MBS market."
Another reason for optimism is the continuing positive influence of the euro. Foreign investors, particularly in Germany, France, Belgium and Luxembourg are comfortable with euro issues, allowing Dutch originators to tap foreign investors with increased confidence. Douglas certainly believes this to be true: "This, plus the strength of Dutch receivables and good credit levels should result in deals selling well outside the Netherlands."
Although the euro may help securitization, some are quick to assert that is not a primary factor in causing market growth. "I don't think it's driving the size of the market, but it allows larger transactions to take place because of wider distribution," said Lewis. "An example of this was the E2.5 billion European Mortgage Securities III deal (originated by ABN Amro). In the days of the guilder I'm sure transactions of that size could not have been done."
However, Simon Best, head of Western European ABS at ING Barings, while acknowledging the wider distribution that the euro brings, wonders if it has really improved the pricing efficiency of the Dutch market. "It's difficult to know whether there has been a net loss in the Dutch market," he said. "This might be the case if originators need to price more widely to bring in foreign investors."
Lack of Legal Clarity
Another factor often cited as a reason for the slow growth in Dutch securitization is the lack of a specific legal framework, such as those implemented in France, Belgium, Italy and elsewhere. There were discussions in 1997 about a draft securitization law, but progress seems to have come to a halt and further discussions do not seem to be on the horizon. Consequently, Dutch securitization works on the basis of existing law.
There certainly was a lack of clarity about how to work within the laws in the early days of securitization in the Netherlands, until the central bank clarified certain matters and the investment banks structured deals to skip around other problems, in particular notification and the rights of set-off.
Notification, where the transfer of mortgage loans from an originator to the SPV requires the notification of borrowers, is also required in other countries and arrangers of deals have found ways of working around it. "Different jurisdictions find different solutions. In Holland, it's done by silent right of pledge," explained Batchvarov. "Originators pledge the mortgage without transferring it, and should there be some unforeseen negative event, such as a downgrade, that is when they notify."
Originators can also avoid the problem of right of set off - where, in case of default by the financial institution, the mortgage debt owed by the borrower can be offset by the deposits the borrower holds within the institution - by including a sufficient amount of credit enhancement within each transaction to cover that possibility.
Generally speaking, institutions trying to arrange deals have no major problems with the Dutch legal framework. In fact, some argue that the lack of a specific law is beneficial, rather than a hindrance to deals, with the flexibility of the system seen as more conducive to securitization than those countries with detailed laws in place.
Unsurprisingly, those closely involved in market have certain problems with Dutch regulators - specifically, that permission is required for every deal - but accept this as a necessary evil. It certainly does not diminish their confidence that the market will grow in 2000 and the years to come.