European corporate securitizations are poised for another slow year, with bank lending remaining the financing route of choice. And volumes could be further pressured this year with a developing new trend that could see some ageing corporate deals refinished as CMBS deals in 2006.

"Traditionally, activity in this sector has been driven by private equity firms using ABS as an exit to funding ventures, but the banking market has been so buoyant and we won't see an increase in issuance until banks are less prone to issue in this area," said Alain Carron at a Standard & Poor's press conference last week in London. The relatively low interest rates and borrowing costs for European corporates in 2005 has put the heat on alternative finance in the secured and unsecured debt markets. S&P said that the total rated volume for European corporate securitizations slowed over the past 12 months. In 2005, the agency rated 23 issues for a total GBP7.9 billion ($13.9 billion), from 20 issues totaling GBP12.1 billion ($21.18) in 2004.

For 2006, the rating agency said it expected the market to remain steady with small and medium sized transactions outnumbering larger deals. One key development in 2005 that is expected to continue this year has been the application of Opco Propco to assets which would previously have been corporate securitizations, for example, Fleet Street (Four Seasons Healthcare) by Goldman Sachs and Barclays Capital and Talisman (Priory) from ABN Amro. According to Matthew Lindsay, a corporate partner at Mishcon de Reya, the Opco/Propco structure often enables a borrower to raise additional funds compared to a straightforward bricks and mortar' financing, provided the target company has a significant number of property assets with a related profitable business element.

"These are single obligor specialist property assets securitizations," said Paul Geertsema at Barclays' securitization research team. "By structuring deals as CMBS rather than as a corporate securitization, issuers are achieving greater leverage and higher ratings for essentially the same assets." Geertsema added that he expected this trend to result in further reductions in corporate securitization issuance and possible redemptions/restructurings of existing corporate securitization transactions into CMBS-type structures in 2006.

Analysts at S&P said that Talisman -2 (Priory) Finance Plc was the first transaction in Europe to be rated with a hybrid blend of corporate securitization and real estate finance analysis enabling the notes to achieve a AAA' rating without the benefit of explicit external third-party support. The transaction is backed by a single loan supported by single tenant operating risk. Michela Bariletti on the structured finance team at S&P said that while these deals are structured on the basis of their real estate value, S&P categorizes them as corporate securitization when they are significantly exposed to the borrower's or tenant's operating risk. "We view it as a whole business deal because when you compare it to a single loan CMBS deal you see much higher exposure to the operational risk."

The benefits of this hybrid structure include a less strict package of operating covenants and higher rating than traditional corporate securitization, said Bariletti. Another feature is bullet payments with refinancing risk at the expected maturity, although the financing term is shorter than that of a classic corporate securitization -at about seven years instead of 30. Other deals have been executed via the private market but now that one market value transaction has been successfully placed in the market the rating agency expects to receive further requests. Bariletti added that other proposals have been analyzed, but whether or not these will make it to the market is difficult to predict.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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