The use of loans backed by commercial real estate (CRE) as collateral for asset-backed CDOs in Europe might not have completely revived a rather dull market, but it has nonetheless added a sparkle that market participants believe has been missing for a while in European asset-backeds.

The tightening of ABS spreads in Europe over the past couple of years has resulted in a significant drop in the interest level for these kinds of CDOs. Leveraged loan CLOs have dominated the European structured finance landscape, and even though there has been a significant tightening in loan spreads as well, as a result of the very strong demand for loan paper, CLOs still offer greater arbitrage opportunities than ABS CDOs, said Shaun Baddeley, an analyst at Derivative Fitch in London. Thus, investors in ABS CDOs have been showing a greater interest in the more "widespread" asset classes such as commercial real estate, in the form of CMBS, B-notes and unsecuritized commercial loans.

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