While RMBS and traditionally structured CDOs have historically driven the Spanish securitization market, times are changing, industry sources said, as the horizon holds new structures and innovations.

According to figures reported by Dresdner Kleinwort Wasserstein, Spain accounts for 7% of European ABS issuance to date, which translates into roughly E5.9 billion of publicly placed issuance - almost twice the E3.5 billion recorded in 2001. Virtually all issuance in 2002 has been floating rate and euro-based, with RMBS and balance-sheet CDOs emerging as the dominant asset classes.

Spanish CDOs generally consist of pools of loans made to small- and medium-sized enterprises (SME), although there is some variation. In the Hesperic No.1, for instance, the loans are made to large corporate entities, and BCL Municipios 1 consists of loans made to local Spanish governments.

In an effort to provide growth in that sector, the Spanish government has typically backed the A-rated and Aa-rated tranches with a government guarantee. More of these transactions are expected to come to market going forward, but a shortage in Treasury funds and a reluctance to incur additional risks means the government has had to rethink what portion of these transactions it will guarantee.

Earlier this year, reports indicated that the government would move ahead with plans to guarantee only a portion of both the most senior tranche balances, but the popularity of these deals has prompted the government to eliminate all support for the top-tiered bonds. "Regarding Fonpymes - loans to small- and medium-sized companies securitized through a State guarantee - it seems clear that next year the Spanish State intends to eliminate this guarantee to A tranches, even though it knows that requests won't stop," explained Jose Pablo Soriano, managing director at Moody's Investors Service Spain.

But the requests have been so numerous that the guarantees might not be as strong as when originally applied, due to the increasing exposure, he said. This has prompted local governments to look into the possibility of picking up the slack. The Local Regional Government of Catalunya, for instance, has pioneered local municipal involvement in the provision of guarantees, and has pledged E500 million of guarantees for local, small- and medium-sized entities. Soriano added that such measures are expected to be duplicated in the near future by other local governments, with the local regional government of Basque country a likely follow-on candidate.

Legal facelift

Anticipated legal changes to the way synthetic securitizations are treated could bring a boom in issuance next year. The Bank of Spain and Commission del Mercado de Valores - the Spanish equivalent of the Securities and Exchange Commission - have formed a commission together with the Spanish Treasury that will review the current law. As it exits, the Bank of Spain has not offered favorable regulatory treatment of credit derivatives, and the SEC, the pension, and the insurance watchdog La Direccion General De Seguros all prohibit mutual funds and insurance companies from investing in these instruments.

So far the market has seen synthetics from only two Spanish banks - Caja Madrid's Cibeles deal and Santander Central Hispano's Hesperic deal - neither of which has been completed with an on-shore SPV, as the banks must employ offshore vehicles in order to ensure regulatory capital relief. The latest deal foreshadowed the potentially large appetite within the Spanish market for such product availability, sparking the interest to review the current stance on synthetic securitizations. "Indeed there is a lot of pressure for the government to enact legislation allowing domestic synthetic securitizations through Spanish vehicles, and according to unofficial sources, this may happen by year's end," said Carlos Hernandez-Canut at Clifford Chance.

If the legislation is put in place, market sources are hoping for a strong surge of in-terest among the larger banks and savings banks. Moody's Soriano, however, noted that the Bank of Spain has in the past recognized the importance of the use of derivatives, yet has continuously offered little regulatory support. In the end, he continued, the possibility remains that the bank will maintain this stance.

"Hence, Spanish regulators are clearly headed for a new legislation enabling synthetic securitization in Spain," Soriano said. "They are even ready to change existing legislation banning mutual funds from investing in such products. The future of synthetic securitization in Spain depends on the regulatory treatment granted by the Bank of Spain, which will obviously use Basel as the paradigm for its treatment of Synthetic securitization."

And more to come

On the corporate side, airline Iberia issued two deals backed by aircraft leases in 1999 and 2000. Two auto transactions containing a portion of car loans originated in Spain have made it onto the scene this year - Fiat's EASe and Peugeot's Auto Compartiment 2002-1. "We have reason to believe that Spanish corporates are interested in securitizing their accounts receivables using bond issuance as the main financing, signaling that market maturity is at hand," Soriano said.

Along with softening its view in regards to synthetics, the Bank of Spain and Spain's SEC have changed their opinion of the securitization of future rights, he added. While it's legally possible to execute under Spanish legislation, no future flows have been completed, largely because the execution of such transactions in the past has been painstakingly slow. The Commission del Mercado de Valores has recently demonstrated a change of opinion, and has indicated that it will be more cooperative going forward.

In the near future, cedulas cajas - the securitizations of mortgage bonds (cedulas hipotecarias) - should maintain their momentum, but Soriano expects to see evolution within this sector. There is a new product developing called Cedulas Territoriales, expected to be launched in December, which functions in much the same way as its counterpart. The difference is that the hipotecarias are backed by the originator's whole mortgage portfolio, whereas the bonds would be backed only by the public sector loans to municipalities in the Territoriales - similar to the German Pfandbriefe market. Soriano noted that over-collateralization for this product will be high, as Cedulas Territoriales cannot exceed 70% of eligible public book.

Hernandez-Canut at Clifford Chance added that beyond RMBS, which is expected to bring an estimated E5 billion before year's end, the market should expect to see assets of utilities' tariffs and infrastructure-related deals in the mix as well.

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