The European securitization market took many strides forward in 1999, a year that confirmed Europe's position as the world's most innovative market. Thanks to a final flurry in late November and early December overall issuance reached around $80 billion (including CLOs and CBOs), according to figures from Merrill Lynch & Co., well ahead of 1998's $60 billion.
On closer inspection the year was a tale of two halves, with the first half of the year seeing demand, supply and liquidity all abound, while the second six months saw liquidity tighten and spreads head out, not to return. While there were several reasons
for this, one of the major factors was cash flowing away from bond and money market funds and being put in equity funds and bank accounts.
Impact Of The Euro
The European market in general benefited hugely from the introduction of the euro, which confirmed the trend towards disintermediation and spurred consolidation in banking and industry.
It also meant that countries which had previously suffered because demand for deals in their currencies was slight or swaps expensive came into their own. Portuguese issuers, for example, had an active 1999, particularly after Deutsche Bank structured the first deal to achieve a triple-A rating by splitting the principal and interest components of loans and getting them into securitization SPVs by different routes. Similarly, Irish mortgage deals came at a pace and a size not seen before the single currency.
Germany, Italy, France
The most significant development in Italy was the ratification of a new securitization law, which was hailed by many as one of the best in Europe. It included a section that allows Italian banks to account for the sale of non-performing loans into a securitization vehicle over five years, rather than taking the tax and accounting punishment in one go, leading to a rash of NPL-backed deals.
The first public NPL deal came in July when Paribas and Fiananzaria Internazionale structured a E1.4 billion ($1.4 billion) NPL-transaction for Banca di Roma. That deal was followed by several more and there are yet more to come in 2000.
The Italian market also saw the world's biggest ever securitization when Merrill Lynch, Paribas and Caboto launched a E4.65 billion deal for the state pensions body, Istituto Nazionale della Previdenza Sociale (INPS). The deal had been structured by Morgan Stanley Dean Witter, Warburg Dillon Read and San Paolo IMI.
The underwriting syndicate launched the deal at previously unheard of spreads for an asset-backed, arguing that it was a quasi-sovereign transaction, as the success of the deal depended on statutory efforts to collect the receivables. Many investors seem to have been convinced, but with much of the market closed for the year-end, the banks will have to wait until next year to find out if the deal will be a complete success.
The German market, meanwhile, built on the progress made in 1998, with true CLOs, synthetic CLOs and
the consolidation of a mortgage-backed securitization market. Significantly, Deutsche arranged a CMBS
for a German subsidiary of ING Group, which parceled the portion of mortgages not eligible to back
pfandbriefe. Deutsche's dominance continued but HypoVereinsbank, Dresdner Kleinwort Benson and
others joined the fun.
Of the main European markets, France was perhaps the odd one out, with a disappointing number of term deals backed by French assets, though asset-backed commercial paper conduits boomed.
Spain continued to plow its own furrow, with no shortage of mortgage deals launched, but many retained in Spain to act as collateral for repos with the central bank.
Sterling Market Shows Depth
The highlight in the U.K. came in May, when several banks hit the sterling market at the same time, launching deals worth more than GBP3 billion ($4.82 billion) in one week. Tamara Adler, head of international securitization at Deutsche, which launched the GBP1.03 billion Honours student loan deal at the time, saw no signs of investors turning deals away because their appetites were sated, a testament to the depth of the market.
Amongst the deals that came that same week was a GBP1.54 billion CMBS that was arranged for British Land by Morgan Stanley. Thanks to a bit of legal cleverness and the fact that the deal only featured GBP100 million of secured notes the transaction enabled the company to securitize rental for the Broadgate development despite mandates written into previous Eurobonds restricting the amount of secured debt the company could issue.
The long-running saga of the parceling of television and other revenues for the Formula One motor racing business the most publicized ABS in the European market's history finally came to a head after West LB came to Morgan Stanley's rescue by agreeing to buy a large portion of the bonds if they were restructured and the total shrunk from $2 billion to $1.4 billion.
It would be fair to say that West LB's securitization group, headed by Robin Saunders, came into their own in 1999, after being poached from Deutsche the year before. Along with the headline grabbing role in the Formula One deal (which saw Formula One impresario Bernie Ecclestone loudly praising Saunders and condemning everyone else in the City) the bank also made waves in Turkey and Germany.
All Quiet In Eastern Europe
The downside of all this excitement was in
Eastern Europe, which along with the other emerging markets, has struggled to recover from the Russian default of August 1998. Apart from one small deal for
a Polish pharmaceuticals firm made possible
largely because the government guarantees debts incurred by state-owned hospitals there was more talk than action.