Speakers at Information Management Network’s Global ABS 2010 discussed what it would take to rebuild the European ABS market and the factors hindering it from coming back at a panel called Restoring Confidence and Rebuilding the Industry: The Role of Securitization.
The panelists emphasized the value of securitization. This is especially true in Europe since in contrast to the U.S. where structures like CDOs proliferated, securitization as a funding tool had a 90% direct effect on the European economy.
“It’s a very different situation here than in other places,” Robert Liao, a managing director at Citi, said. He added that European players are mostly seeking out term funding stability and that there was a lot more thought placed into rating migration in Europe.
Peter Jeffrey, European structured finance group leader at Pricewaterhousecoopers, pointed out that, particularly in Europe where a lot of the individual savings are held in long-term pension plans, there has to be a mechanism to flow the cash from the pension industry to the banking system or from long-term holders to a short-term provider of funds.
Despite the importance of securitization as a funding tool for European companies, there are obviously pervasive problems that have been threatening the industry since the start of the financial crisis.
Frabrice Susini, global head of securitization at BNP Paribas, pointed to the current lack of an ABS investor base, and the need to access new buyers, including those that have not traditionally invested in structured finance.
However, he said that there are securitization and non-securitization related factors that are holding investors back from participating in ABS transactions. Under the former would fall uncertainties surrounding sovereign risk while the lack of deal transparency and doubts regarding new regulation would characterize the latter.
Steve Gandy, head of securitization at Santander Global Banking & Markets, cited the cost of doing a securitization as another hindrance. He also said that there needs to be an increase in investor sophistication where these buyers are able to do their own modeling as opposed to buying securities on the basis of the deal's rating and the company's name.
Gandy added that issuers should provide the tools to investors to analyze what they are buying. Investors should have detailed information about the loans so that they could model and understand loan features such as CPRs and trigger scenarios.
The panelists also talked about the detrimental impact of regulation on the European ABS market.
“The big problems are the lack of consistency and coordination,” Susini said. He said that there are several entities that are trying to regulate the market, resulting in regulations that are done on a piecemeal basis.
Liao added that the problem is Europe is a heterogenous market where there could be several types of mortgage products in a mortgage pool, for instance.
He also suggested that rating agencies should be willing to resist some of the regulation since these dramatic changes don’t really make sense given the historical performance in European collateral. However, he did acknowledge that rating agencies are an important part of market liquidity. The ratings, he said, provide a certain consistent language that market players can rely on.
David Krisher, a partner at Allen & Overy, said that even if regulation kills securitization, the solution still lies on a structured finance base. “it’s one of those situations where you can’t live with it but you can’t live without it.” He pointed out that the securitization structures cannot really be blamed when, “at the end of the day, the problem is human psychology.”
Meanwhile, Gandy said there’s always a danger that regulations would be “throwing the baby out with the bathwater.” He added that he is hoping for regulatory best practices.