The European ABS market continued to demonstrate depth and maturity in 2002, illustrated by a substantial increase in volume. The market saw approximately $130 billion by the end of 2002, according to reports, compared to just a few years ago when yearly ABS volume was less than $50 billion. And while the market had yet to weather a negative credit cycle, it nonetheless ducked the 2002 credit-crunch hook - proof of the stamina of European ABS structures.

"Over the last year we have witnessed poor economic conditions, natural disasters, the threat of war and terrorism, the decline of the stock markets and an increased rating volatility among banks and corporates," said analysts at Fitch Ratings. "Although this will be of solace to any investor who has suffered as a result of a rating watch or downgrade, the European securitization market is displaying resilience in the present difficult climate."

For example, the whole business securitization for London City Airport, dubbed City Aviation Finance, put the structure to the test. Despite the difficult times experienced throughout the entire airline industry, the rating agency assessed that there was no serious long-term impact on the airport and affirmed the ratings late last year (see ASR 12/16/02).

The UK and Italy continued to be dominant sources of issuance last year, though newcomers are starting to establish themselves in the market as well. Portugal, for example, saw strong volumes in its consumer and auto ABS loans and maintained steady performance. Fitch expects these transactions to continue to perform well.

Though year-end 2002 volume barely topped 2001, the European ABS market continues to provide a safe haven for both investors and issuers seeking shelter from the chaos throughout the financial markets. According to Fitch, 14% of European ABS deals were downgraded while 8% were upgraded. Among the 430 publicly rated deals the agency has reviewed, 35 have had one or more tranches upgraded while 60 have had one or more downgraded.

What lies ahead

Given that several deals withdrew from the last-minute December mayhem of the market, the start of 2003 should be busy with 2002's leftover business. Analysts believe that the market may see significant growth this year, but with another Gulf War looming, the resiliency of and investor confidence in European ABS demonstrated in 2002 will continue to be tested. "We expect growth across the market, but most notably in CMBS, RMBS, and operating company and transport-related transactions," reported Morgan Stanley. "While the significant shocks of the last few years have had less of an effect on ABS than other credit markets, one cannot rule out such an event occurring and having a significant effect on issuance in 2003."

Overall, the European RMBS sector grew to $51.9 billion in 2002 from $47.5 billion in 2001. According to bank analysts, RMBS will likely continue to dominate UK issuance. This year, volume is expected to increase to $30 billion from the $26 billion in UK RMBS issuance recorded in 2002. Analysts at Morgan Stanley noted that it's likely that big-name lenders who have established master trust structures will be at the forefront of issuance.

Continental Europe should experience a rise in RMBS issuance from Italy, which has shown gradually increasing volume in the sector. The Italians are expected to add at least another $3 billion from RMBS to its 2003 securitization repertoire, bringing up its total to approximately $8 billion. The Netherlands has also experienced a rise in ABS volume, with a need to exploit alternate avenues of funding driving that country's RMBS appetite. "For some single-A rated bank issuers and insurance companies, mortgage securitizations now offer attractive funding," said Morgan Stanley.

CMBS issuance should also see a slight increase from the $18 billion recorded in 2002. According to a Fitch report, continental Europe will continue to move toward the sale/leaseback structure, as corporates begin to view this vehicle as an alternative to traditional bank debt. The rating agency said that growth rides on the back of experience, and more companies are becoming comfortable with the structure. According to reports, new entrants expected to bring transactions this year include J.P. Morgan Chase and Bear Stearns - both of which are slated to launch over GBP300 million later this year.

"We had expected to see more sale/leasebacks in 2002 on the back of corporates using their assets to raise cash due to the drying-up of other funding, but this did not materialize," said Morgan Stanley. "Lack of decisiveness by European corporates and the time required in structuring large transactions have stalled the process, and we believe that 2003 will be the year where many sales/leasebacks will finally come to the market."

The Italian government is expected to continue its real estate securitization program, and Italian banks are also expected to issue between $1 billion and $2 billion of sale/leaseback paper, said market sources.

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