VENICE - A poll on the major trends in European securitization for 2006 conducted at the European Securitization Forum's third annual meeting returned one perfectly predictable result: the implementation of Basel II is the issue of the year for many players.
Poll respondents were in the audience attending an interactive panel last Wednesday moderated by Christopher Davis, managing director in the securitized products group at Deutsche Bank. They were a varied lot, including investors, issuers, service providers and a mysterious other category that even the panelists couldn't decipher.
Not everyone was preoccupied with Basel. For instance, panelist Robert Plehn, head of securitization at HBOS, said it's not an issue his team is terribly concerned with at the moment. "But many [other] issuers are concerned about it," he said. "I think it proves a point - you need to look at every issuer and what their approach will be and how much issuance they will do. A lot of people have different issues that need to be discussed with regulators but I think we'll still see lots of triple-A RMBS come out of the market."
Basel II's most significant potential effect would be to change the supply composition by bringing about more triple-A securities and fewer subordinated tranches. Still, there remained a small minority of industry players in the audience that didn't foresee any meaningful impact from the new accord.
Plehn said HBOS will continue to employ securitization to diversify funding. But he believes institutions relying on securitization for capital purposes will continue issuing in the same volumes as before.
Panelist Ralf Bauer, managing director at Fortis Bank, said that investors have good reason to believe that Basel II will erode issuance. "There is less availability of paper because less can be included under Basel II, but it's good to hear that issuers like HBOS still plan on looking at the market from an alternative funding perspective," he said.
Ian Bell, managing director at Standard & Poor's, took a wait-and-see approach. "The reality is that all these institutions still have to run their numbers under Basel II - once these numbers come out you have to figure in national interpretation of the rules," he said. "It's like putting it into a mosaic - you'll have to wait and see what the picture will really look like."
CMBS growth is another factor the audience said would drive trends this year. Bell said that CMBS growth in 2005 was enormous and conduits were a major part of that growth. "The future amount of headroom is huge and the appetite is strong but will there still be value in the coming year? This will be the key for future growth," said Bell.
Alexander Batchvarov, head of structured finance research at Merrill Lynch, said he was surprised that so little importance was given to credit events. In his mind, it is the most important trend to monitor this year. "I think it shows a bit of complacency or maybe people are overwhelmed by the topic," he said. "The time spent on credit is not sufficient."
Batchvarov added that issues like early repayments combined with complex structures are factors that are hard to control and in CDOs, market players must pay attention to what goes into the collateral pool. "It's important to keep in mind that even if a credit event does not affect a transaction today...the effect is cumulative," he said.
Davis also polled the audience on spread trends for the year. The majority believes spreads will modestly tighten this year. Fortis' Bauer said that barring a credit event, there would still be appetite for product. "New investors in the market and existing ones wanting to expand," he said. "Overall I am positive that again we will see tighter spreads."
Does it mean the market is too expensive? Bauer said that pricing reflects the robustness of the product currently marketing and that deals have benefited from the positive factors that have been driving the market over the last couple of years.
However, a concern among bankers is how long this positive credit environment will last. "The downturn is coming and that should have some impact on market liquidity" a panelist said.
On the CDO front, the biggest potential upset for 2006 would be an unexpected single obligor shock, respondents said. Running a close second in Wednesday's poll was increased correlation volatility, while the availability of collateral placed third. Merrill's Batchvarov said these issues were weighty but only in respect to synthetic corporate deals. "It is difficult to discuss CDOs as one market," he said.
The audience voted housing prices to be the most likely factor to impact current market stability. Plehn said that at HBOS, they have become more bullish on their housing forecast and that the slight decline expected for the beginning of this year has not happened yet.
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