The head of Deutsche Bank's structured finance research team, Ganesh Rajendra, started 2008 on a hopeful note. He held a conference recently at the Deutsche Bank offices in London titled A New Dawn After the Storm. Despite his display of optimism for the European securitization market, Rajendra said that the dark clouds have yet to clear completely.
For the past years, Rajendra said that the annual ABS outlook presentation targeted for investors had become mundane. But this changed because of the extraordinary events in 2H07. For these presentations, the research team would usually extrapolate on the year before and more often than not got it right, he said.
While the full extent of the crises may not be over, Rajendra told the investors present at the conference that the market, especially on the secondary side, will be ready to proceed with business in as little as a few months if the market continues to correct itself.
Deal flow in the short term is likely to be limited to banks clearing their warehouses and repo-based financing. For now, credit and payment activity is stable, but the run on structured finance had harmed overall asset values. "At some point the banking market should normalize - meaning that prices for term financial credit may be reestablished and which, in turn, is likely to create a better backdrop for ABS prices," he said.
The main hurdle for investors, he said, is to overcome the significant loss of faith in tranching. Furthermore, confidence in ratings needs to be rebuilt. To this point, rating agencies have already shifted their methodology internally, and 2008 is likely to see significant rating downgrades, he said. The rating agencies are becoming more proactive and less reactive, and they are not going to wait for losses to happen before they act, Rajendra said.
However, Rajendra said that according to Moody's Investor Service, only 4% of securitized products in 2007 are expected to default and, at those levels, most structures can easily pull through. Rajendra added that new securitization models are likely to overtake shorter term paper in the coming year.
An investor from a major U.K. bank said he was pleased with Rajendra's optimism and that his bank was looking to buy more securitizations in the coming months. "All we care about is the default rate, and we can live with four percent," he said. "But we are not going to invest in any notes with a shorter than five- to seven-year maturity."
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