Diversifying an international RMBS portfolio generally entails investors chomping down on a plethora of U.K. and Dutch transactions. However, analysts suggest that in the face of a harsh global slowdown, a Spanish RMBS just may be the morsel investors enjoy the most.

Boasting very high quality paper that may provide a safe haven for spooked international investors, Spanish banks are increasingly trying to break the traditional Spanish RMBS mold by tapping global ABS markets. Bankinter SA is currently in the market with a 1.322 billion deal, backed by a pool of 20,000 residential mortgages. Bankinter 3 Fondo de Titulizacin Hipotecaria will place internationally and marks the third transaction from the firm.

"The excellent underwriting and the systems of the bank, the general demographics and the economics of Spain, make this deal, and Spanish RMBS deals in general, strong transactions within the European market," said Jose Ramn Tora, director of structured finance in the Madrid office of S&P.

The European market is dominated by U.K. and Dutch transactions, which account for 75% of the 2000 and 2001 market, according to an analyst at Dresdner Kleinwort Wasserstein. While Spanish RMBS deals only account for 3% of the European market, they seem to maintain investor appetite.

Lack of supply

Typically, investors have had an affinity for Spain's RMBS transactions, though it is not often that such a deal is placed in the international market. "The demand has been there, but there hasn't been a lot of supply," said Nick Morgan, a trader with Dresdner.

So far this year, Spain has only brought three RMBS transactions to the international market, most recently Hipocat 4, preceded by TDA 14 and Rural Hipotecario II -all totaling 1.14 billion in issuance.

"It's a very high quality product, investors have always liked it," Morgan said. "The problem has been that a lot of it has been sold into Spain and not really orientated to the international market."

Part of the reason the RMBS market is mostly a domestic market is that the Bank of Spain accepts triple-A RMBS as repo collateral, and most deals are generally small, which creates a lack of real benchmarks in the market.

Some are trying to break the traditional RMBS mold by tapping the international market. Bankinter SA is currently in the market with a 1.322 billion deal, backed by a pool of 20,000 residential mortgages. Bankinter 3 Fondo de Titulizacion Hipotecaria will place internationally and marks the third transaction from the firm.

"Bankinter wants to come as a repeat issuer to the market," said the Dresdner analyst. "They want to use securitization as a vehicle of placing paper to generate mortgages and place them into the capital markets. The more banks that take this approach, the more paper we'll see."

The A class has been assigned a preliminary triple-A rating from Standard & Poor's, the B class has obtained an A-plus preliminary rating and the C class a triple-B-plus. The deal also features a subordinated loan.

"The excellent underwriting and the systems of the bank, the general demographics and the economics of Spain, make this deal, and Spanish RMBS deals in general, strong transactions within the European market," said Jose Ramn Tora, director of structured finance in the Madrid office of S&P.

Low LTV

As the economies enter into a slowdown, the impact it will have on the European markets and Spain remains to be seen. However, economists at Dresdner expect growth in 2001 and 2002 to reach 2.7% and 2.3% in Spain. "Growth is not as high as it use to be in Spain but it's still above 2% for next two years, which is quite high, or high compared to most other countries," the Dresdner analyst said.

Additionally, as other outstanding RMBS deals in the secondary market throughout Europe seem somewhat jolted by the events in the United States on September 11, spreads on existing Spanish RMBS deals have tightened.

"We think within the ABS market, [the RMBS market] is the safest place to be, at present - Spain in particular because if you look at the market you will find a very low LTV (loan-to-value) there in comparison to other European countries," the Dresdner analyst said.

The Spanish securitization law requires a low LTV level in order to reduce the risk of default. Analysts say the low LTV levels will prove beneficial as the economic downturn trickles further down the road.

According to a Spanish RMBS report issued by Dresdner, weighted average LTVs of European RMBS pools can range from 40% to over 100%.

Although Italy also has low LTV levels, sources say that Spanish paper is of higher quality. Additionally, the Italian RMBS market is relatively new and investors therefore have very little deal history, which may cause uneasiness among investors, which is reflected in the wider pricing, according to the Dresdner report.

"There's only one market that comes close to being as high quality as Spain and that's Holland," said Morgan. "It's higher quality than Italy, and there's very little supply out of Spain."

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