According to Standard & Poor's, total funded issuance in the French securitization market in 2002 was $9.68 billion - up from $6.76 billion recorded a year earlier. Auto loans were the favored asset type last year, with four transactions coming to market accounting for 53% of ABS public issuance in 2002. If the market is to experience a similar growth rate this year, however, French securitizations will have to look beyond the auto sector.
"The growth in the cash market was distinguished by French auto loans, but originators, while they may still look to tap the securitization [market], will likely have little left by way of French assets to include in the pools," explained one market analyst. "Many of these deals have demonstrated innovation and often include pan-European assets. It's likely that, going forward, future consumer loans within this asset class will include assets outside of France."
The story of one bank
Sources at Societe General (SG) are banking on French securitization to make serious headway. For SG, France is a special market where the bank has established a natural presence. Considering an economic rebound on the horizon - not just in France but also throughout the Eurozone - the bank expects to see stronger growth.
Last year, SG laid down its cards in the heated game of French auto loan ABS by arranging one of the most innovative transactions to emerge from the French market in 2002. The $1.5 billion U.S. equivalent transaction for French car manufacturer Renault SA - dubbed Cars Alliance Funding PLC - differed on two fronts: it was the first master-trust-like structure from France, and it was the first time a transaction managed to get the seller interest rated. According to one source at SG, this rating provided a way for Renault to increase its funding rate out of the portfolio.
The master-trust like structure was setup as part of a pan-European program. "Last year we did see a great deal of auto loans, and we think that potentially we can see some repeat issuers that will include French assets," said one source.
Consumer finance as a whole experienced steady growth throughout Europe last year, and in France it's expected to take center stage again. And although it is possible that originators like Renault may still have some French loans left, the numbers may be limited. Instead, the focus will likely shift onto credit card receivables and consumer loans. One analyst, in fact, warned that the market must entice new issuers to tap the market if overall figures are to continue growing.
Challenges ahead
"It's not as easy as one would think, especially with the challenges of more stringent accounting regulations and a changing regulatory environment," said an S&P analyst. "On the other hand, growth is likely to stem from the innovative reaction to these changes."
The proposed changes to the IAS accounting rules - likely to affect the evolution of the French accounting rules - could introduce new constraints on transactions. According to a Moody's report, these constraints are likely to stem from the deconsolidation benefit, which may influence originators in their decision to securitize, and could also motivate them to restructure existing transactions. Moody's also lists the changes in the capital adequacy standards listed in the Basle II Accord that will be implemented in 2005. The local adaptations of the accounting standards by French regulators may put some additional strain on French players.
These changes are certain to have an impact on the market, but analysts say that it's difficult to pinpoint what exactly will evolve. Bankers at SG said that French players viewed securitization as a tool for achieving off-balance sheet treatment when the market began in 1998, but considering the new accounting rules, more potential originators are now thinking in terms of funding that is likely to bring on additional clients.
As to who these potential clients will be, the bank is unable to disclose details at this point. However, sources did indicate that significant interest has been generated by deals such as the aforementioned Renault transaction. SG also managed to complete a $140 million securitization of a warehousing facility in a suburb of Paris for ProLogis. "It is the first time a rating agency agreed on the bankruptcy criteria for this type of structure," said one banker. "Our team achieved a bankruptcy-remote transaction that allows the market to consider this type of structure from a legal point of view, and it has created a lot of interest."
SG said it also expects to see an increasing number of unfunded deals backed by varying types of asset classes this year, as well as a growing interest in trade-receivables transactions.
As for CMBS, it's likely that originators may see changes that will make French property companies tax-exempt. This law would enable real estate investment companies to benefit from a tax-transparent regime similar to the American Reties.
According to S&P, French property companies will be allowed to convert to tax-exempt status under the new law, provided that they channel at least 85% of their net operating income into dividend payments each year and pay an exit-tax of 16.5% on unrealized capital gains as of year-end 2002. The new law will make it easier for tax-exempt companies to realize cash through asset disposals, and will also enhance their overall financial flexibility. Consequently, CMBS transactions could be postponed until 2004 when the new law would take effect.
"It is a possibility that structured financing of real estate transactions could be lowered because this new regime is not mandatory, but rather an option to be exercised by concerned companies. We believe they will first assess the ins and outs of such a new regime," said one source at SG. "As this new regime will definitely increase the liquidity of the real estate market, some companies would prefer to switch their strategy from carrying assets to an asset-rotation strategy that does not require financing."
