With the favorable macroeconomic environment set to continue into 2007, European securitization market volume is expected to break the record 458 billion ($591 billion) issued in 2006, the European Securitization Forum (ESF) said.
Factors such as stronger economic growth, the improved employment situation, continued housing sector strength and the associated credit expansion, the ESF said, are supportive of both rising issuance volume and credit quality.
Increased liquidity met by increasing investor demand should also support more growth in the market. Based on a quarterly survey they conducted, Citigroup analysts said that investors are set to increase their allocations into European and U.S. securitized products, as well as into emerging markets. "Given the economic outlook and a potential shift from bank lending to capital markets in Europe (and U.S. supply forecasts), we expect this trend to continue in 2007," Citigroup analysts reported. "We expect some new European subprime/non-conforming jurisdictions in 2007."
This rapid expansion of European volumes has done little to pressure pricing spreads out, though the ESF said that there are already signs of some tiering in the market. Citigroup analysts reported that the number of investors that expect spreads to tighten seems to have increased.
"(Triple-A) euro (five-year WAL) RMBS spreads were flat for the quarter at about 11 basis points, and about one to two basis points tighter for the year," the ESF reported. "However, spreads have tightened in yieldier' sectors such as CDO and CMBS, though there is some dispersion depending on the specific deal structure. Leveraged loan (double-A rated CLO (seven- to 10-year WAL) spreads were flat for the quarter at 38 basis points but seven basis points tighter than a year ago, and A'- rated CLO (eight- to 10-year WAL) were two basis points wider for the quarter but about eight basis points tighter than a year ago."
Investors searching for additional yield are driving a growing demand for lower rated paper and more complex structures such as rated CDO equity and CPDOs. "The recent trends of more securitized product investors, additional collateral classes, and increased number of countries of collateral are continuing and are factors in the market growth," the ESF said.
According to Citigroup, the number of European investors using ABS derivatives also increased in 2006 and is expected to rise further over the coming months, both in U.S. and European ABS. Around a third of all investors that have responded to Citigroup's quarterly survey have said that they intend to use ABS derivatives in the U.S. and Europe, but the majority still to go long. Citi analysts said they expected this to remain the case in Europe in the first half of 2007.
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