Following a quieter than anticipated performance in the first half of the year, the European securitization sector is back on track following a busy third quarter.
Those were the findings of Merrill Lynch's ABS international research team, headed by Alexander Batchvarov, who predicts a strong showing in the final quarter will see issuance up on last year. Despite this, Merrill now believes its initial forecast of $100 billion for 2000 was optimistic, saying that "seems increasingly unlikely to be reached, unless a number of large, one-off transactions come to market."
In the year to date, there has been $60 billion of issuance, up $3.5 billion from the same period in 1999, and the number of deals has also risen from 109 to 122. The $21 billion raised in the third quarter is a record total for Europe.
However, the growth has not been universal across all the major countries. Unsurprisingly, the U.K. is still the dominant nation, and having issued $11 billion in the third quarter, is accountable for 44% of the European market in the year so far. As in previous years, much of the activity in the U.K. stems from the retail sector.
This year, Italy has usurped Germany as the second biggest market. The 17 transactions launched out of the country have amounted to $6.2 billion, 11% of the market. Although this figure stems largely from non-performing assets, a variety of performing asset-backed deals are also starting to come through, notably in the auto loans, corporate loans and leasing sectors.
Germany's slide into third place - issuance has slipped from $11.6 billion in the first nine months last year to $4.5 million in 2000 - is attributed to a drop in activity in non-MBS asset classes. Previously, a large number of collateralised loan obligations (CLOs) were the order of the day but this market seems to have dried up for the moment.
Disappointing issuance has also been noted in France, the Netherlands and Spain. Merrill attributes the absence of a sustained flow out of France as a result of investors buying Obligations Foncieres, a domestic alternative to mortgage-backed bonds. The bank is hopeful that the Dutch and Spanish performance will pick up in the remaining months, although this will have to be a substantial improvement if they are to match last year's levels. As things stand, the two countries have only reached 50% of the total achieved in 1999.
Spreads in the market remain fairly stable, a positive reflection on the market bearing in mind the recent surge in activity. Merrill believes that positive demand factors, including an investor shift towards credit products, a widening investor base for ABS and MBS products, and a higher demand for subordinated paper, have allowed spreads to stay within range.
In terms of seeking value in the U.K., investors are advised to look closely at auto loans and commercial mortgage-backed transactions. Compared with credit cards, Merrill believes the "spread available on selected auto loan ABS represents ample reward for taking down amortizing, relatively illiquid paper."
Commercial mortgage-backed deals are currently pricing around 15 basis points cheaper than prime MBS deals, and Merrill argues this offers value as the "exposure risks are adequately mitigated through underlying property and tenant diversification."