Though hailed as a pending hot spot for collateralized bond obligations, the European high-yield market - being so telecom-intensive - faces industry concentration issues that will likely spawn a wave of CBOs backed by a mixture of European and U.S. high-yield assets, analysts said.
"I don't know how long until there's a boost, but there are clearly transactions being done and being contemplated right now," said Lori Evangel, head of the CBO group at MBIA.
One of the first Euro-backed CBOs, structured by the Morgan Stanley Dean Witter's London counterpart and called Euro Credit I, was launched last year into the U.S. market.
The backdrop in Europe is extremely favorable for the development of a very large capital market, said Nathan Sandler, CBO fund manger at Trust Company of the West.
This backdrop includes the European economic integration, increasing cross-border merger and acquisition activity, and a large economic block now trading in a single currency. The fundamentals and trends are favorable for the continuing development in the securitization industry, Sanders said.
TCW is currently marketing a $250 million to $350 million CBO to European investors, called Euro GEM I. The transaction is backed by emerging markets debt (see profile p. 16).
Though traditionally a loan market, the sizeable increase in European high-yield assets resulting from M&A activity has produced an investor base that's beginning to resemble the U.S. investor base: producing a landscape ripe for repackaging.
"I think that these things are going to start happening more and more," said MBIA's Evangel. "I just think that the most likely scenario out of the box is that people are going to have to put a mixture of European high-yield and U.S. high-yield in, or a mixture of European high yield and something else, because this telecom concentration issue is real."
Companies like NTL, Vodafone AirTouch, United Pan European Communications, Telia AB, and Telenor AS have received most of the press and investor attention in the European high yield universe. And some of the large, investment-grade names like British Telecom and Deutsche Telekom also have captured some of the attention by way of acquisitions as well as competition, especially in the wireless subsector.
There was $2.7 billion issued in European telecom junk bonds in the first quarter, according to Thomson Financial Securities Data, up more than 300% from $659.1 million in the first quarter 1999.
Already being marketed to investors, sources said a hybrid deal, backed 70% by U.S. high yield and 30% by European high-yield assets, is slated for this quarter. The transaction will likely feature a monoline wrap.
As fund managers continue seeking new assets for their structured CBOs, the likelihood of cross collateral grows. Domestically, CBOs are already being packaged with asset-backed collateral. Additionally, transactions backed by high-yield and asset-backed assets, as well as tranches from other CBOs, are being put together.
As for the spurt in Europe, the first transactions are likely to be pure, and more conservatively drawn.
There's not likely to be asset-backeds in the initial European CBOs, said a banker working in the collateralized debt sector.
"I would expect it to develop though, if the European market is really modeling itself after the U.S.," the banker said. "Though these transactions (with asset-backed collateral) just started happening in the U.S."
Furthermore, there's a real possibility that the initial transactions will be insured.
"I think the potential for a surety could be interesting, because the asset class is going to be new, and probably not well understood by investors, and there will also be questions on ultimate recovery rates," Evangel said. "So for those reasons, the use of a surety could be very beneficial."