European securitization continues to expand at a torrid pace. During morning discussions at last week's Global ABS conference held in Barcelona, delegates got a mixed view as to the implications of such growth. While several top European bankers wondered aloud whether volatility was ahead, yet another respected buy-side chairman told the industry that there is plenty of incentive to carry on with the party.
The European market should issue an annualized 630 billion ($837 billion) in ABS, judging from the current run-rate and according to the European Securitization Forum. That would represent a 57.5% increase from the previous year, based on current numbers. The continent managed to do 400 billion in securitizations last year. Residential RMBS, which account for about 50% of overall issuance, and CDOs should continue to constitute the bulk of issuance, said Ralf Bauer, global head of structured credit at Fortis Bank.
Such stunning growth prompted some market professionals to ask when the party will be over and whether the industry is prepared to withstand future volatility, which they see as a natural occurrence in the credit cycle.
"The credit cycle has been positive for a while, but what goes up must come down," said Greg Medcraft, a managing director and global head of securitization at Societe Generale. Along with Bauer, Medcraft was featured on a panel that included heads of securitization at several leading European banks.
An upset will not happen for the foreseeable future - and not while market innovations continue to spark demand from asset managers around the globe, said Robert Parker, vice chairman of Credit Suisse Asset Management.
"There is too much caution in the market," Parker said. "I think the structured products industry is one of the most exciting parts of our industry."
For instance, there is a large demand for structured credit products from Middle East and Asian investors. Also, Basel II policies actually favor the covered bond market and will act as a catalyst for growth. Asset managers increasingly want to go long/short on their equity pools.
Although U.S. Treasury yields are moving up - a couple of panelists alluded to the steepening yield curve - tight credit will continue.
"You will see some widening of spreads, but the process will be very slow," Parker said. "Credit spreads are not expanding relative to the market."
Admittedly, the credit market must keep a close eye on several developments, including rising U.S. mortgage delinquency rates. Indeed, delinquency rates among U.S. subprime mortgages could reach 16% or 17%, Parker said.
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