RMBS from all over Europe continues to flood the market. According to Dresdner Kleinwort Wasserstein there is over E9 billion (US$10.4 billion) of European prime RMBS expected to price before the end of summer.

New on the scene is the E1 billion (US$1.16 billion) Swedish RMBS deal, SRM Investment No.3. As the title indicates it's not a first for the Swedish National Housing Finance Corp, but it is the first time the notes are being backed by loans made to housing co-ops. In the earlier deals the collateral backing the notes included loans provided to single-family houses. Here under SRM 3 the co-op is the owner if the residential properties and all loans are secured by Pantbrev - the bearer document is issued by the Swedish official registry of real estate.

The deal includes E895 million (US$1 billion) triple A bonds, E32.5 million (US$37.8 million) of double A bonds, E35 million (US$40.7 million) of single A bonds and E37.5 million ($US43.6 million of triple A bonds. Price talk for the Triple A bonds were at +21 to +23 basis points over three-month Euriobor.

A new Swiss RMBS deal also joins in with Credit Suisse First Boston marketing a $2.3 billion transaction dubbed Chalet Finance 1 plc. In total, there are 13,517 prime first lien mortgages backing the deal. It's structured with three triple A tranches in three different currencies including a $650 million note, a E1 billion (US$1.16 billion) tranche and a CHF500 million (US$375 million) tranche. An additional E15 million (US$17.4 million) single A bond and a E22 million (US$ 25.6 million) triple B bond were also being marketed.

On the U.K. front, a fifth GBP250 million (US$417.8 million) RMBS deal from the Paragon mortgage series began marketing. Paragon is a leading U.K. buy-to-let lender. HSBC is the lead manager in what is Paragon's second effort to get this deal off the ground. Market players may recall that late last year the deal was marketed as a GBP500 million (US$835.7 million) deal by Societe Generale. The deal is structured with two triple-A note tranches offering GBP50 million (US$83.5 million) and GBP176.25 million ($294.58 million) respectively, and a GBP23.75 million (US$39.6 million) single A tranche.

Beyond RMBS?

And perhaps the best testament to a market heavy with RMBS issues is the rumor mill surrounding the structured covered bond issue expected in the coming days by mortgage lender HBOS. It would mark the first transaction issued by a U.K. lender in the covered bond sector and it joins the growing interest in covered bonds among all European market participants. Ireland recently established a covered bonds framework and saw its first issue this year from the German-based bank DEPFA.

According to Moody's Investors Service, the major difference between structured covered bonds and ABS is that investors continue to have either direct or indirect recourse to the originator. The underlying collateral would repay the bonds only if the originator defaults. In a securitization, the cash flows from the assets serve to repay the bonds. "Current execution levels would suggest the superiority of covered bonds as pure funding instruments," reported William Ross, head of the asset securitization research team at ABN AMRO. "But with Basle II set to narrow dramatically the differential risk weighting between RMBS and covered bonds, we believe the question remains open."

Talks of HBOS initiating the market brings hopeful speculation that this might lead other originators to follow. Covered bonds offer a cheaper method of financing as well as a having a large investor base.

"Structured-covered bonds are more corporate tied - you should have more liquidity but in return you might have to give up margin," said one market source. "But in RMBS, there is less liquidity. For some, the choice may not look as cost-effective. The question that has to be asked is whether you want to be an issuer in that market as opposed to an investor."

It's clear that covered bonds give originators another means of financing. The complexity of securitization can generate a lot of added costs, and covered bonds to the extent that they work, and at least deliver market confidence and they can also facilitate speed of execution.

But it's likely that the choice won't be either covered bonds or securitization. Moody's earlier this year published a special report where it defines a structured covered bond as a covered bond where securitization techniques have been incorporated to enhance the ratings of the bonds. In the case of HBOS where no covered bond framework exists, using a securitization technique is the only way to successfully access the market. The Netherlands is a veteran to this technique and has issued bonds under a medium-termed note program where a security trustee countersigns the notes. "We remain sanguine about the outlook for RMBS in general, and the possibility of a positive synergy between the two instruments in particular," said Ross at ABN.


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