European funds have started raising money to buy deeply discounted collateral. Some smaller finance houses have even started to invest in mortgage servicing groups that deal with distressed paper.

Market players say it's an encouraging sign that these funds are betting on the European securitization market's eventual recovery.

The aim is to take advantage of the current price dislocation in European ABS. Market analysts said that distressed debt is likely to be a major source of revenue in the foreseeable future.

The prime example is BlackRock, which earlier this month said it intends to buy a $15 billion portfolio of subprime mortgage debt from UBS marked down to 32pc.

In Europe, BNP Paribas and JPMorgan Asset Management are rumored to be prepping a pan-European roadshow to launch their opportunities fund to institutional investors.

The fund will invest in prime RMBS, including nonconforming, CMBS, CLOs, SME CLOs and consumer ABS. The fund's size will be determined based on demand.

Apollo Real Estate Advisors, a New York-based real estate investment firm run by William Mack, has also reportedly taken over London-based Stoneleigh Capital to originate its own loans and to invest in distressed debt from bank lenders.

The group will help manage a new fund dedicated to buying European real estate loans at a discount from banks or to lending money to investors, similar to its $1 billion fund set up in the U.S.

Pimco launched a similar fund last year to invest in distressed mortgage securities. The firm also launched a bank loan fund this year. Its $2 billion distressed debt fund buys a variety of assets, including MBS, ABS and CDOs.

It's hard to believe that the market is reprocessing the very instruments that started the current credit crisis. Even though these funds could potentially make lots of money, they should do so with caution.

Recall that Joe McDevitt, chief executive of Pimco in Europe, has said that banks have been in a de-leveraging crisis, causing the dislocation in the markets. He added that the aftershocks of this continue to affect the real economy. This, in turn, is expected to lead to rising default rates, particularly in the corporate sector.

But it's also hard to ignore that the only way this market is ever going to really get back on its feet is if banks begin shifting these "troubled" loans off their books and get back to business.

The Bank of England's special liquidity scheme and the European Central Bank's willingness to accept these loans for its repo facilities are just a couple of measures that have been done.

However, there is still a great deal of overhang that needs to be dealt with, and every little bit of interest helps in the long


(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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