Germany enters August with the promise of a broader securitization market, thanks to recent changes made to its true-sale legislation but market pundits still wonder if the law will be enough to seriously impact German securitization volumes.
"The German securitization market has had the reputation of being over-estimated for the last five years running," said one market source. "It's catching up but it is still far away from having a liquid true-sale market like the U.K." German structured financing has produced about 53 billion ($65 billion) outstanding ABCP, about 1 billion public and mortgage covered bonds, according to Standard & Poor's, as well as a public term segment in which an estimated 130 billion) of synthetic risk has been transferred.
Germany's inability to realize its potential has been chalked up to potential issuers finding cheaper liquidity elsewhere - the pfandbriefe has poised fierce competition in the past. Traditional residential mortgage lenders that have the ability to securitize pay a liquidity premium while dealing with a more complex and expensive product in securitization.
Following the completion of Volkswagen AG's true-sale auto-loan securitization, Driver One, executed via the TSI platform (see ASR 12/6/04) some market players doubted the efficiency of the true-sale structure under German legislation. With the introduction of the new mortgage refinance register last month (see ASR 7/18/05) some market players argue that banking securitization legislation is now better than ever but there is still doubt over the efficiency of true-sale laws.
"The parties active in securitization in Germany are a relatively select group of institutions that are doing these deals primarily for economic risk transfer and regulatory capital relief and synthetic trades are generally easier and quicker to do," said Sven Meyer at Deutsche Bank Securities. "I don't think these institutions will jump and only go to true-sale to achieve these goals; for refinancing purposes this route usually does not compare favorably to their other available alternatives; as long as risk transfer is the only reason to do a transaction, true sale is competitive only in certain circumstances but eventually I think there will be a strategic redirection and some banks will look to true-sale as a way to diversify their funding sources and build an investor base in the structured finance market."
Lobbyists backing the effort to get this law pushed through quickly were likely expecting a more readily receptive audience. Meyer said he believes no one really anticipated how much the market would change in the two and a quarter years the legislation has been in development.
"Two years ago, when the discussions about setting up the true-sale initiative started, there was a perception in the market that access to credit was limited for German SMEs and that banks would be increasingly inclined to lend to these companies if they were able to risk-manage and refinance the exposures directly via securitization," he said. "There was a real perceived need to facilitate the use of true-sale. By the time the initiative was completed that need no longer seemed to exist to the same degree, however we see instead an increasing demand for mezzanine financing products that have come to market via the securitization route, which shows investors' interest to take on exposures sitting at a more subordinated position in the corporate capital structure."
Though the true-sale boom may be more of a whimper initially, the market could expect to see structured true-sales as early as 1Q06, driven by demand for access to lower tiered paper. Deutsche Bank is currently working on a mezzanine financing and a number of other banks, like HSBC Securities, are currently setting up similar structures. "We will mainly see the use of this structure [True Sale transactions using the financing register] in CMBS deals," said Nico Trautwein at Commerzbank. "In addition, there will be a flow of true-sale transactions related to assets from small to medium enterprises - these types of assets under Basle II carry quite a considerable risk weighting and banks have an interest to manage their exposure to these assets, through securitisation."
However Deutsche Bank's Meyer added that Germany has historically not produced many CMBS and those that have been done publicly have largely been synthetic structures. "I am skeptical that there will be a boom of true-sale CMBS structures because they are quite rating intensive and time consuming to do," added Meyer. "There is a certain volume of transactions done via the ABCP conduit route but not all are public and total volume is hard to estimate."
"Going forward we estimate the market will be 60/40 synthetic [to] true-sale, as refinancing via true-sale still is an expensive route to take. We would expect the impact to be more on RMBS and CLOs - there are more asset pools to securitize and these are generally more established and thus easier to sell," Meyer said.
Trautwein is more optimistic about how quickly legislation will begin impacting volumes and for the time being Commerzbank does not intend to do synthetics and is looking at its portfolio to securitize via the true-sale route. He added that other banks are looking to do the same - Eurohypo, which has in the past done a number of synthetic deals, intends to only pursue the true-sale route for the time being.
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