While synthetics typically dominate the German securitization landscape, for some time now market players prompted by the continuing regulatory changes have predicted that going forward executing funded ABS should be much easier to accomplish.

The latest topic to support a rise in funded securitizations is the elimination of interest sub-participation in German deals. The proposed change was released as part of the BAKred checklist for German credit institutions that buy protection via synthetic securitizations in April 2002. It will be implemented sometime early this year.

According to Merrill Lynch, under the provision structures would have to ensure that sub-participation does not act to reduce loss allocation that would otherwise have been attributable to a tranche receiving such sub-participation.

In the past, synthetics offered investors the advantage to make whole on a first loss piece if it suffered excess loss under the checklist. With this sort of advantage disappearing, investors might find funded transactions more appealing, said one market source.

"Our understanding is that a document is due to be released shortly on this topic," said Robert Patterson vice president of the securitized products group at Morgan Stanley. "Whilst this on its own will not push issuers into more funded issuance, we think this coupled with increased funding costs on an unsecured basis, and pressure on German banks' capital ratios, will prompt them to do more funded deals."

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