The year so far has not seen the anticipated level of activity in the European securitization market. And the signs are that the trend will continue for the remainder of 2000, according to many players in the market. Which begs the question: what has caused the slowdown in the market? Unfortunately, it is a question that market players are finding difficult to answer.
According to predictions made by Merrill Lynch at the beginning of the year, the expected market volume for the period running from the middle of May to the end of June was estimated at $10 billion to $12 billion. Unless we see a couple of mega-deals appear from nowhere in the next few weeks, the actual volume of transactions will be way down on what was anticipated.
Alexander Batchvarov, head of international ABS research at Merrill Lynch, believes that the main problems stem from a lack of supply, not a shortage of demand. "It's definitely not a lack of investor appetite; it's more the number of delays on the supply side," he said. "It's difficult to explain what they are a function of, but at present we've seen $22 billion to $23 billion of issuance this year. The general market expectation for total issuance this was $100 billion and this was just the mid-point of the consensus."
Batchvarov is pessimistic that the gap can be bridged. "We're already in June. How likely are we to see $80 billion of deals in the next six months, given that August and December are generally slow months?" he asked. "That's why I'm waiting to see whether this $10 billion will materialize in the next few weeks. Given that many deals have been in the pipeline since February and March and keep slipping back, my gut feeling is that the expected volume of issuance is not going to happen, at least not before the end of June."
Simon Best, head of West European ABS for ING Barings concurred with that view. "The market is certainly down on the volumes we were seeing last year," he said. "There is a reasonable amount of business in the pipeline, but it probably won't get us up to the heady heights of last year."
Best believes that there are a number of factors influencing the current state of affairs. "To some extent, it's a case of some deals taking a longer time to put together," he said. "I also think interpretations of the International Accounting Standards have had a modest impact in causing some issuers to go in other directions. This was put in place largely with the aim of stopping off-balance sheet leasing, so if an item of capital is used in a business, it should be included on the balance sheet. Accounting firms are still looking for a consistent view on how to interpret this.
"In addition, the CDO market has been a lot quieter, and potentially there is also a shift towards conduits for some transactions because it presents an opportunity for banks to try and improve the pricing."
Best feels that the aftershocks of the Asian crisis are still affecting the market. "Since it happened, bond spreads have widened out and there is much more discrimination by asset class and to some extent by credit rating," he continued.
"This has made a bond issue more expensive and maybe some potential deals have been priced out at the margins. For some asset classes it may be possible to address that problem by putting them in a conduit, where banks still feel they can get an adequate return on capital, and can price inside where the bond market would price."
Best also dismisses the idea that investor appetite has fallen. "It still seems pretty good, certainly in the sterling market" he said. "Every time someone has put anything other than a non-conforming mortgage deal on the market, it certainly hasn't stayed on the shelf too long."
As is often the case in these situations, there are winners and losers and in this case the market conditions are favorable for potential issuers. "Of course, the market has two sides: demand and supply," explained Batchvarov. "The demand is there but there isn't the supply which helps issuers because the spreads are tight."
Some players believed that the market would pick after the traditional lull at Easter. "From what we were hearing at the time, we really believed that there was going to be a big increase in May," said Eve Flotron, an ABS research analyst at J.P. Morgan. "It just hasn't happened for some reason. Maybe deals are becoming more complex and the process is taking longer to arrange and for deals to get rated."
Flotron thought the current situation was not entirely negative. "I guess the one good thing is that investors are looking more closely at deals they may not have previously considered," she said. "And that also means that, for the time being anyway, that they are looking not simply at triple-A paper, but at the junior tranches as well and we hope that continues in the future."