The European securitization investor psyche can be pretty hard to access given the limited opportunities they currently have. But as the market gears for a recovery, tailoring deals to the buyers' needs is the key to their success.
"The problem in Europe is the investors' ability to assess risk," said David Covey, EMEA securitized products research director at Lehman Brothers. The remarks were made at the analysts' roundtable at last week's Information Management Network's and European Securitization Forum's Global ABS conference. "The liquidity and stability they sought is no longer available, and investors need to look at the market from a more risk/reward type of analysis. We aren't there yet," Covey said.
One of the bigger questions is whether the triple-A investor base will ever recover. Most of this paper was taken up by SIVs and money market investors, which fell victim to the credit crisis and, for the most part, the consensus is that these buyers will never come back.
"You need to have reasonable liquidity for the rest of the buyers who were once active in this segment before they consider returning," said Reto Bachmann, head of European ABS strategy at UBS.
Down the line, Bachmann expected some banks that have left the market only temporarily to begin investing again. He also expects insurers who haven't been as affected by the current turmoil to begin picking up some business in the near term.
"We are seeing banks buying back their own bonds because they are performing well, and if they have problems they can always replace them in the ECB program," he said.
Birgit Specht, head of ABS research at Citigroup, said that banks also face another wave of liquidity restraints once the FAS 140 comes into effect. "There is uncertainty about the capital requirements and the funding requirements, and the new regulations could affect banks' debt-to-ratio levels," she added.
Analysts also said that while U.S. write-downs might be cooling off, the effect of the credit crisis on the global economy might just be unraveling. In the U.K., for example, analysts now expect a much worse impact on housing prices than what was predicted even three months ago. It's looking more likely that the U.K. will enter into a recession.
"I think we are far from seeing the worst," Specht said. "Investors refused to accept that we are following a similar path as was seen in the U.S. I think that we are still at the beginning, and we could see more deterioration and wider pricing before it gets better."
Developments on the ratings and regulatory side have yet to fully impact European structures, but strides in transparency can only boost investor confidence. "Having information will make it easier for investors to make decisions, but investors want better underlying information and better structure," Covey said. "Buyers can't rely on the ratings agencies or analysts' forecast, so we need loan-level detail."
Analysts are starting to see some loan-level data coming from companies such as GMAC and Merrill Lynch. "If you make the information available not just to investors but to the whole market, then research desks could process it and provide more interesting results, like collateral models, and make them available to investors," Bachmann said.
But opportunities still exist for investors willing to do their homework. "Investors need to go back to fundamentals and discriminate even within the same asset type and jurisdictions," said Camino Hidalgo, head of ABS research at Santander.
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